Editorials

Costly loans will hurt Kenya’s recovery steps

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Summary

  • That banks have started increasing loan prices following the rise in interest rates on short-term Treasury bills means individuals and businesses are headed for rough times in terms of credit access.
  • Businesses and households are struggling with the coronavirus pandemic that has hit them hard and the availability of affordable credit is expected to navigate the bumpy terrain.

That banks have started increasing loan prices following the rise in interest rates on short-term Treasury bills means individuals and businesses are headed for rough times in terms of credit access.

Businesses and households are struggling with the coronavirus pandemic that has hit them hard and the availability of affordable credit is expected to navigate the bumpy terrain.

Absa Bank Kenya, for instance, has notified some of its clients that the base rate on their loans will increase by half a percentage point to 7.5 percent effective June 4. The bank attributes the rise to an increase in T-bill rates.

More banks are likely to join in Absa's move and increase base rates, which will be a further burden especially to those who have taken up loans for investment.

Indeed, investors have not stabilised from the February lending rates rise to 12.02 percent from a low of 11.75 percent in September.

Cheap credit offers Kenya the one chance of restoring the health of the labour market as companies can borrow and hire to raise production that declined during Covid-19 lockdowns; boost trade as Kenyans can take loans to buy and sell goods and services; offset the steep decline in spending experienced last year; and, provide respite for households facing the loss of employment and a decline in income.

The economy was gradually picking up supported largely by agriculture, construction, and resilient export, sectors that are heavily dependent on overdrafts and big loans.

An increase in the cost of loans will jeopardise growth prospects in these sectors.

New lending will also be depressed, affecting small and medium-sized businesses and lower-income households more acutely.

Given the pandemic's already huge economic costs, ensuring renewed borrowing by businesses looking for capital to recover must be a top priority for the Kenyan government.

However, as the government plans to borrow an estimated Sh662 billion from the domestic market in the new fiscal year starting July 1, up from Sh540 billion this year, increased domestic borrowing is expected to influence lending rates in the short term.

To sustain economic growth, keep affordable credit flowing.