Capital Markets

Banks root for CBK rate rise to arrest non-performing loans


Kenya Bankers Association Chief Executive Officer Dr Habil Olaka at Sarova Stanley Nairobi on March 1, 2023. PHOTO | DENNIS ONSONGO | NMG

The Kenya Bankers Association (KBA) has called for further monetary policy tightening by the Central Bank of Kenya, terming it a cure to elevated non-performing loans.

The apex bank left the benchmark Central Bank Rate (CBR) unchanged at 10.5 percent in August, noting the effects of its prior interest rate increments were adequate.

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According to the banking sector lobby, a further increase in the benchmark lending rate would cool down the demand for credit, preventing the further build-up in bad loans.

“We argue that a further (moderate) monetary policy tightening would support measures taken previously to tame inflationary pressures and rising inflationary expectations, cool off credit demand and supply while averting a sharper build-up in non-performing loans,” KBA said in a research note on Wednesday.

“Interest rates continue to edge upwards in response to the existing tight monetary policy stance. Higher interest rates are expected to raise the cost of credit thereby moderate credit demand.”

Already, interest rates on commercial bank loans stand at multi-year highs on the backdrop of a general increase in interest rates driven largely by previous rate resets by the Central Bank of Kenya (CBK) and competition from government securities.

The average commercial lending rate touched a 65-month high of 13.5 percent in July to mirror the effect of rising interest rates.

Asset quality in the banking sector has come under pressure from the rising interest rates, signalling borrowers’ inability to service loans.

Data from the CBK shows the ratio of gross non-performing loans edged upwards to 14.7 percent in July from 14.5 percent in June, pointing to deteriorating asset quality for the industry.

Read: How increasing interest rates set banks for profit windfall

Last month, the CBK noted the number of loan applications and approvals had remained strong, reflecting resilience in economic activities.

KBA has backed higher rates to equally contain the inflationary pressures due to factors like fuel prices.

CBK’s Monetary Policy Committee is set to meet on Tuesday next week.

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