Credit crunch hits homes as banks cut lending by Sh112bn
The credit crunch is the product of costly loans that have discouraged borrowers and forced banks to cut lending to risky borrowers on fears of default.
Banks cut Sh122.1 billion worth of loans to households and businesses in the nine months to September, triggering a cash crunch and defaults amid costly credit.
This is the largest drop in decades after new credit grew by Sh340.1 billion in the same period last year on the back of cheaper loans.
The credit crunch is the product of costly loans that have discouraged borrowers and forced banks to cut lending to risky borrowers on fears of default.
Limited credit for homes and businesses has reduced the flow of money in consumers’ pockets and dimmed orders for goods and services in corporate Kenya, ultimately forcing firms to cut jobs and freeze pay.
Equity Bank Kenya, which saw its loan book shrink by Sh31.3 billion in the period to September, has linked the drop to high interest rates.
“During difficult times, our customers have reduced their loans by five percent. Equity also behaving like a prudent customer has reduced its borrowings from global development banks by 68 percent on higher borrowing costs,” said James Mwangi, the Equity Group chief executive.
“Our borrowing rates globally have moved from 3.5 percent to 12 percent, and we have said this is not the period to borrow, and I guess that’s what our customers have said too. Our interest rates have moved from 13 percent to 18 percent because of the Central Bank Rate (CBR), Treasury bills and bond rates and hence the decline in our net loans and advances.”
The average lending rate by commercial banks increased to 16.9 percent in September 2024 compared to 14 percent a year earlier.
Stanbic Bank Kenya had the largest loan book contraction in the nine months as net loans shrank Sh32.1 billion to Sh218.7 billion Major banks that have recorded a decline in their loan books include KCB Bank Kenya (Sh2.4 billion), Absa Bank Kenya (Sh19.5 billion), Standard Chartered Bank Kenya (Sh11.9 billion) and I&M Bank Kenya (Sh5.9 billion).
Cooperative Bank of Kenya bucked the trend among its tier I peers with a Sh100 million loan book expansion in the nine months.
The Treasury expects the CBK interest rate cuts to reverse the drop in new loans.
“The month-on-month credit flow to the private sector has slowed down since December 2023. This is because the consequences of fighting supply-driven inflation is that it has negative effects on economic vibrancy in the short run,” said the Treasury last week.
“Credit to the private sector is expected to recover as lending rates decline due to the continued easing of the monetary policy stance in October 2024.”
The CBK on October 8 lowered its benchmark interest rate by 75 basis points from 12 percent—the largest cut since the start of the Covid-19 economic hardships in March 2020.
This followed the lowering of the standard rate by 25 basis points in August to 12.75 percent, a drop analysts reckon is yet to reflect on lending rates at a time when demand for credit has slowed to levels seen in 2017.
A drop in lending rates is expected to cut the mounting loan defaults and stimulate demand for loans that will put money in consumers’ pockets and rekindle orders for goods and services in corporate Kenya.
The fall in CBR was expected to trigger a fall in the cost of loans for households and firms who have struggled to service costly credit since the CBK started raising rates in June 2022 amid global economic shocks that saw inflation rise to multi-year highs.
Demand for credit slowed to a record low of 0.2 percent growth.
The CBK considers credit growth of 12 to 15 percent to be sufficient to support the healthy growth of the economy.
The drop in the cost of loans is expected to prompt consumers to take up funds for investments and consumption in the coming months, boosting economic activities.
Cheap credit could also help banks easily manage the rising stock of non-performing loans that have surged due to expensive credit and Kenya’s soft economy.
This has given birth to a rising number of distressed borrowers whose assets such as homes, cars and furniture are being seized by aggressive banks.
CBK data shows that non-performing loans hit a record Sh674.9 billion in August from Sh657.6 billion in July and Sh621.3 billion at the start of the year.
