Private sector credit growth drops to a 28-month low

Cabinet Secretary, National Treasury & Economic Planning Njuguna Ndung'u on May 17, 2023.  

Photo credit: File | Nation Media Group

Growth in private sector credit slumped to a 28-month low of 7.9 percent in March as commercial banks reduced lending amidst rising borrowing costs and loan defaults.

An analysis of fresh data from the Treasury shows that private sector credit growth dipped from 10.3 percent in February as the economy felt the heat of high interest rates.

At the same time, the volume of foreign currency loans shrank from the appreciation of the Kenya shilling against the US dollar and other major world currencies.

The slump in credit to the private sector points to difficulties households and businesses face trying to obtain credit from the banks as borrowing costs prove prohibitive or as the financial institutions go slow on lending to contain loan defaults.

“Growth in private sector credit from the banking system declined to 7.9 percent in the year to March 2024 compared to a growth of 11.6 percent in March 2023, partly reflecting the impact of monetary policy tightening and the effect of exchange rate appreciation on foreign currency loans,” the Treasury stated.

Commercial banks have increased borrowing costs in recent months as part of the transmission of a tight monetary policy defined by a higher benchmark interest rate set by the Central Bank of Kenya (CBK).

The average commercial bank lending rate soared to 15.88 percent as of February, compared to 13.06 percent at the same time last year.

Equity Bank, for instance, is currently pricing loans at up to 26.7 percent for its most risky borrowers, with its reference rate at 18.24 percent as of February this year.

Meanwhile, loan defaults have soared, with the industry’s non-performing loans peaking at a 16-year high of 15.5 percent as of February.

Data from the credit reference bureau (CRB) TransUnion shows that more than a quarter of loan accounts had been blacklisted by the end of last year as borrowers struggled with costly debt in a soft economy.

Some 7.65 million active accounts fell into default at the end of December, compared to 3.89 million accounts at the end of the first quarter to March 2023.

TransUnion attributed the rise in loan defaults to elevated borrowing costs alongside tax measures, which combined to significantly reduce consumers’ net pay.

Private sector credit adjusted for exchange rate movements has been contained below a double-digit rate since December 2022, a development the CBK deems a reflection of higher interest rates by the apex bank.

For instance, while overall credit growth to the private sector was 10.3 percent in March, the rise when adjusted for exchange rate depreciation was 8.4 percent.

“Growth in credit to the private sector, adjusted for exchange rate depreciation has been moderate, reflecting the impact of monetary policy tightening,” the CBK noted in a brief at its last policy-setting meeting in April.

Despite the multi-year weakness seen in private sector growth, the Treasury expects lending to the sector to remain resilient, supported mainly by working capital requirements for businesses.

“Growth in private sector credit is expected to remain relatively stable, supported by, among other factors, sustained demand particularly from working capital due to resilient economic activity, and the implementation of the credit guarantee scheme for vulnerable MSMEs,” the Treasury added.

Private sector credit witnessed a resurgence after the November 2019 repeal of interest rate caps, which had stalled loan issuances by banks to households and businesses.

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