Commercial banks’ lending to the private sector contracted 1.1 percent in the year to November 2024 on high borrowing costs, marking the first annualised dip since the Moi era in September 2002 when lenders cut their credit lines by 0.6 percent.
Central Bank of Kenya (CBK) data shows private sector credit from the banking system slowed during the 12 months, following a stagnation in October and a meagre growth of 0.4 percent in September.
A slowdown in lending portends slower economic growth since most investments and consumption are funded by credit, principally loans from commercial banks.
Growth in loans to the private sector has taken a hit from elevated interest costs despite recent cuts to the benchmark lending rate by the CBK, with the strengthening of the shilling also contributing to reduction of the size of foreign currency-denominated facilities.
“Growth in private sector credit from the banking system declined by 1.1 percent in the year to November 2024 compared to a growth of 13.2 percent in the year to November 2023, due to the impact of exchange rate appreciation on foreign currency-denominated loans and the lagged effects of monetary policy tightening,” the Treasury notes in its draft 2025 budget policy statement.
“Reduced credit growth was observed in manufacturing, finance and insurance, trade (exports) and building and construction sub-sectors. These are some of the sub-sectors with significant foreign currency-denominated loans.”
Outstanding loans to the private sector fell to Sh3.813 trillion in November 2024 from Sh3.854 trillion a year earlier, representing a dip of Sh41.1 billion in credit to households and businesses in absolute terms.
Commercial banks have kept interest cost on loans elevated despite CBK’s move to push down rates by trimming the benchmark rate beginning in August last year.
The average commercial bank lending rate rose from 16.84 percent in August to 17.22 percent in November while the benchmark, also known as the Central Bank Rate (CBR), has eased from 13 percent at the start of August to 11.25 percent at present.
Meanwhile borrowing costs in the interbank market, interest from government securities, savings and fixed deposit rates have all fallen.
The deposit rate --the return paid to long-term depositors in banks— for instance, eased to 10.41 percent as at December 2024 after peaking at 11.28 percent in July while the savings rate, paid to short-term depositors, fell from a high of 5.11 percent in June to 3.54 percent in November.
Commercial banks have previously pointed to structural challenges as being constraints to the faster decline in interest rates on loans, including rising loan defaults and increased competition for bank deposits from government securities.
The rise in defaults has resulted in the reduced extension of credit to the private sector as banks tighten credit standards and prioritise investments in less risky assets such as government securities.
The CBK has reprimanded commercial banks for ignoring rate cut signals, demanding to see lower lending costs.
CBK Governor Kamau Thugge accused commercial banks of being too eager to raise borrowing costs while not maintaining the same agility in reducing their interest charges as domestic interest rates fall.
“When central bank raised the policy rate, banks were very quick to raise their lending rates. All we are asking for is for banks to be fair and act in the same way by reducing interest rates as soon as possible,” Dr Thugge said following the CBK’s monetary policy committee decision to lower the CBR further to 11.25 percent from 12 percent in December last year.
Loan facilities
The CBK held meetings with the chief executive officers of commercial banks between November and December last year in its bid to see lower rates on loan facilities.
Banks, represented by the industry lobby Kenya Bankers Association (KBA), committed to reducing lending rates after the third straight CBR cut in December.
KBA noted that individual banks would issue requisite notices to customers indicating reductions in loan rates from December 2024.
“The Kenya Bankers Association (KBA) recognises the challenges individuals and businesses face arising from the prevailing high cost of loans, and the role that the CBK plays in guiding the market on credit pricing,” KBA chairman John Gachora said in a December 8 statement.
“The recent successive cuts in the CBR have implications on both deposit and lending rates in the market. Banks are taking steps to lower interest rates and make borrowing more affordable.”