The 2020 pandemic may have been the biggest economic shock to hit the country in its history, with most businesses being forced to shut down or operate on limited hours with a dusk-to-dawn curfew.
Banks, nevertheless, showed resilience in the face of the once-in-a-lifetime shock, growing their loan book by Sh225 billion in the calendar year, even as loan impairments hit Sh90.8 billion during the period.
High interest rates and loan defaults this year have, however, forced a rare lending pullback by commercial banks with gross loans through nine months to September dipping by Sh135 billion to Sh4.064 trillion from Sh4.199 trillion in December 2023.
This has been a rarity for the banking industry, which hasn’t registered a loan book contraction for at least 17 years, according to available data from the Central Bank of Kenya (CBK).
Banks had further managed to overcome the 2008 post-poll violence to expand credit in the market with Sh145 billion in new gross lending for the year.
Kenya Bankers Association (KBA) chief executive officer Raimond Molenje says default concerns in a high interest rate environment, combined with a stronger Kenya shilling forced the rare contraction in banks’ lending.
“Banks tightened lending due to the escalation of non-performing loans. Exchange rate strengthening effect leading to lower valuation in domestic currency denominated loans, which account for about 26 percent of total loans has also led to the decline in lending by commercial banks,” he said in an interview.
Bank shares in total credit have dropped to 83.2 percent as of October 2024 from 84.8 percent at the same time last year, according to secondary CBK data.
In their place, savings and credit cooperatives (Saccos) have offered a key lifeline to cash-strapped households and businesses.
Sacco loans as a share of total credit have risen from 14.2 percent in October 2023 to 15.9 percent in October this year, as the member-based financial institutions fill the void left by banks.
The ratio of gross non-performing loans to total gross loans has remained at a near two-decade high of 16.5 percent as of October, largely reflecting reduced lending.
Non-performing loans (NPLs), in absolute terms, were only up by Sh48.2 billion between December last year and September 2024.
This contrasts with a Sh133.6 billion build-up of loan defaults across 2023, which was offset by a Sh522 billion increase in gross loans for the banking industry.
The year to December 2023 saw the biggest climb in NPLs in at least eight years, but the impairment was well masked by the fastest growth in gross loans for at least 17 years.
The high interest rates on commercial bank loans are traceable to the CBK’s action to tame inflation and address the dramatic weakening of the shilling by lifting its indicative benchmark interest rate since June 2023.
Following stability in both the exchange rate and consumer costs, the CBK has now changed its stance by lowering the central bank rate to stimulate new lending from banks.
The apex bank has undertaken three consecutive benchmark rate cuts since August 2024, lowering the key rate by 1.75 percent from the peak of 13 percent to 11.25 percent.
The rate cuts are aimed at signalling lower borrowing costs, including commercial banks lending rates.
Banks have, however, been slow to pass on the lower interest rates, pointing to structural rigidities, including the elevated cost of funds as the lenders compete with government securities to retain deposits.
The lack of policy transmission by commercial banks has drawn the ire of the CBK, with governor Kamau Thugge summoning bank chief executives over the persistence of high interest rates.
The apex bank is betting on the cumulative benchmark rate cuts through December 2024 to be incentive enough for commercial banks to trim their respective rates.
Lending to the private sector has remained depressed, plunging to zero in October to signal that borrowing from banks is unchanged from a year ago. The stasis risks slowing economic growth since a large part of consumption and capital investments is financed by debt.
KBA’s Raimond Molenje says the full effect of the triple rate cut by CBK will be gradual as banks see a slower adjustment to their cost of funds, while the high ratio of non-performing loans continues to prove problematic.
“The 1.75 percent base rate cuts so far implemented by CBK’s Monetary Policy Committee continue to be transmitted through the market albeit slowly, mainly on account of slower adjustments in deposit costs and the elevated costs for banks in resolving NPLs triggered by credit litigations,” he added.
The interest paid on fixed deposits is expected to fall substantially in the wake of the decline in Treasury bill rates, with the interest on the 91-day paper being the first to fall below the 10 percent mark.
