Commercial banks’ loan book shrank by about Sh200 billion in the five months to June as potential borrowers held back due to high interest rates and an appreciating shilling devalued dollar-denominated loans.
The reduction in lending signals a reduced pace of investment and consumption, slowing down growth at a time when the economy is absorbing the impact of protests and uncertainty surrounding tax policy.
The loan book has been on a decline since the start of the year, falling by Sh138.8 billion in two months to end of March alone, according to the Central Bank of Kenya (CBK).
Banks’ lending further shrank by 1.5 percent between April and June, exacerbating an unusual slump as borrowers became wary of tapping loans in an environment of rising interest rates and banks feared suffering further loan defaults. The April-June fall is about Sh61.25 billion, assuming the April loan book had changed little from the March level of Sh4.08 trillion.
Lenders have linked the decline on reduced appetite for credit in an environment that has seen interest rates jump by more than seven percentage points in the past 18 months to reach highs of 26 percent currently.
They have also cited the appreciation in the value of the shilling to a reduction in the value of close to 30 percent of the sector’s loan book that is in dollars.
Equity Bank Kenya, Stanbic Bank Kenya and Victoria Commercial Bank —the three banks that have so far published their financial results for the six months ended June 2024— have all posted a decline in their loan books, aligning with the CBK data.
Equity's loan book declined by Sh25.73 billion or 5.7 percent in the six months to end of June 2024 while that of Stanbic dipped by Sh22.34 billion or 8.6 percent in the same period. Victoria’s loan book declined by Sh1.83 billion.
The reduced borrowing, added to the devaluation of dollar-denominated loans, has left the loan book trending downwards even as lenders hope that the recent cut in central bank rate (CBR) will reverse the trend.
“We were competing with deposits with the public sector and that increased our cost of funds. Banks increased interest rates to 18-24 percent to match market conditions and, of course, what entrepreneurs do is to postpone borrowing. That explains why Kenya [loan book] is down,” said James Mwangi, Equity Group’s chief executive.
The drop in loan book comes on the back of banks having seen the number of loan accounts drop by 1.52 million to 12.92 million in the year ended December 2023, in what was the first dip in five years in the period the CBK raised the base rate three times.
The CBK last week cut the CBR to 12.75 percent from 13 percent, marking the first cut since March 2020 on the back of easing inflation and stable shilling. This signals a slight decline in borrowing costs.
“We are confident that we will reverse the trend of declining loan book that is because of customers holding back… Customers were deferring borrowing decisions because of the high interest rates,” said Mr Mwangi.
A decline in loan book for reasons other than exchange rate movement suggests that the value of maturing loans has been more than that of new borrowings.
Borrowers could be facing a credit crunch given that the pace of private sector credit growth has slowed down to levels last seen five years ago.
According to the CBK, growth in shilling-denominated loans stood at 10.2 percent in June, with the foreign currency-denominated loans, which account for about 26 percent of total loans, contracting by 13.3 percent. This came in the period the shilling gained 17.2 percent against the US dollar.
Many of the large banks hold dollar-denominated loans above the industry’s average.
Equity Group chief risk officer Sam Gitwekere said the Kenyan subsidiary's dollar loans were 53 percent of total look book as at end of June but had since declined to 43 percent. Stanbic Bank Kenya and South Sudan chief executive Joshua Oigara said that while the Kenyan unit’s loan book shrank, it does not alarm him because it was more to do with the devaluation of the foreign currency loans than a reduction borrowing.
“We have to distinguish noise from the signal. Generally, foreign currency loans are valued at low exchange rate compared to last year. There is a shrinkage but it is not organic. I am not concerned at all in terms of momentum of our local and foreign currency loan book on constant terms,” said Mr Oigara.
He said that Stanbic’s local currency loan book grew by 28 percent while the foreign currency one dropped by 29 percent. He added that at constant terms, the combined loan book would have been up by 9.5 percent.
The CBK said last week that private sector credit growth was four percent in June, the slowest since the 3.4 percent in February 2019.
The regulator said the deceleration partly reflects exchange rate valuation effects on foreign currency-denominated loans.
Mr Oigara, however, said the government’s appetite for funds in the domestic market has contributed to the reduced pace of growth in private sector borrowing, both by driving up interest rates on loans as well as increasing the cost of retaining customer deposits.
“What has been the difficulty is that the sovereign still has an appetite to borrow. So there is obviously an exclusion of private sector from borrowing because government is offering 15-16 percent. That is a risk that we need to deal with,” said Mr Oigara.
“That is always a crisis for the industry. The biggest driver in our market today is sovereign, not clients. So even with few thousand [of shillings], my customers are saying ‘I want to buy a bond’ and now we have a decision to make between keeping the deposits and allowing them to buy the bond.”
