Lending to the private sector by commercial banks grew by four percent in the year to June 2024 compared to 13.9 percent at the beginning of the year, the slowest pace in five years, hurt by the effect of a stronger shilling on foreign currency loans and reduced borrowing capacity by businesses and households due to higher interest rates.
This is the slowest pace that private sector credit has expanded in percentage terms since February 2019 (3.4 percent), when lending to the private sector was still under the constraints of the rate cap.
The annual growth to June 2024 translates to an actual increase of about Sh146.1 billion in new loans to hit Sh3.798 trillion in June 2024 from Sh3.652 trillion in June 2023.
Growth in private sector credit is one of the key indicators of economic growth, given that bank loans are the primary source of new capital for businesses seeking expansion and therefore creation of employment.
The Central Bank of Kenya (CBK) considers credit growth of 12 to 15 percent to be sufficient to support the healthy growth of the economy.
CBK Governor Kamau Thugge last week partly attributed the sharp slowdown in credit growth to the contraction in the shilling value of loans denominated in foreign currency following the strengthening of the shilling since March.
The Governor noted that with an adjustment for the exchange rate valuation of loans, credit growth would be at 6.6 percent, from 8.3 percent at the end of 2023. By the end of June, foreign currency-denominated loans accounted for about 26 percent of total loans in the banking sector.
“On local currency loans, by the end of December 2023 that credit grew by 15 percent, but owing to the tightening of monetary policy, that has decelerated to 10.2 percent,” said Dr Thugge.
“The credit denominated in foreign currency has had a sharp decline (from 10.9 percent to minus 13.3 percent) reflecting the appreciation of the exchange rate.”
In 2023, when the shilling weakened by 21 percent to the dollar, there was no significant inflationary effect on credit growth, suggesting that banks had started to ease back on actual lending over that period.
The decline in growth for local currency loans is also indicative of the challenge that businesses and households have faced in affording credit at elevated interest rates.
Banks have periodically adjusted their interest rates on loans in tandem with the increase in the CBK’s base lending rate over the past year as it battled high inflation and a weakening shilling.
Going into June 2023, the base rate stood at 9.5 percent, with the CBK adjusting it upwards progressively to 13 percent by June 2024. The CBR was however cut by 0.25 percentage points to 12.75 percent in last week’s monetary policy committee meeting.
The average lending rate (before risk premium and other costs) had climbed to 16.6 percent in May 2024, from 13.21 percent a year earlier.
Lenders have also been keeping an eye on the worsening quality of their loan book, therefore tightening credit standards for private sector borrowers.
The banking sector's non-performing loans ratio stood at 16.3 percent in June 2024, up from 14.5 percent in June 2023.
