SME credit  squeeze is bad for the economy


The Central Bank of Kenya, Nairobi. FILE PHOTO | DENNIS ONSONGO | NMG

The shrinking of the commercial banks’ loan book for the first time in 20 months in July suggests that the financial institutions are taking a cautious approach to issuing new loans amid rising defaults.

Central Bank of Kenya data show gross loan book shrank to Sh3.975 trillion in July from Sh3.98 trillion the previous month, marking the first month-on-month decline since December 2021.

The banks are seemingly keen to contain defaults, which rose to Sh586.2 billion, even as they find lending to the government attractive against the backdrop of a sustained rise in the yields on Treasury bonds and Treasury bills.

Unfortunately, this has come at a cost to the economy, with private sector credit growth easing for the third straight month to 10.3 percent in July, the slowest in 17 months since 9.2 percent in February 2022.

A slowdown in private sector credit growth is bad for economic performance given that small businesses, despite being the key economic drivers, are often the first casualty of a credit crunch.

Local banks are increasingly adopting risk-based loan pricing, making it harder for individuals and small businesses deemed risky borrowers to access credit.

This paper last week reported the case of a bank that was closing accounts of small businesses with a monthly cash flow of less than Sh10 million. Such drastic measures are avoidable if banks use credit scoring properly.

For its part, the government needs to cut its appetite for domestic debt, which has increasingly seen it crowd out the private sector.