Higher credit demand sets economy on recovery path

CBK Governor, Prof Njuguna Ndung’u. Photo/FILE
CBK Governor, Prof Njuguna Ndung’u. Photo/FILE 

Hopes for sustained economic recovery have been bolstered by growing private sector borrowing and increased spending on goods and services.

The total stock of loans advanced by commercial banks to private borrowers increased by Sh16 billion to Sh707 billion between September and October.

According to the Central Bank of Kenya (CBK) governor Njuguna Ndung’u, the increased lending to the private sector indicated that the economy had moved “to a recovery path.”

CBK data show that banks have been lending an average of Sh6.2 billion in the nine months to September, a pointer of an upturn in the past two months.

Prof Ndung’u said figures provided by the Kenya Revenue Authority (KRA) showed VAT tax receipts (which reflect consumption trends) were on an upward trend, a view supported by manufacturers.

Lending to households

Banks have cut their lending to households for fear of increased default in an economy that is delivering layoffs, lower corporate earnings and measly annual salary increments, while corporate had cut back demand for credit fearing accumulating debt as their sales had dropped to record lows.

The slow down in lending in part contributed in part to the subdued consumer demand for goods and services, which slackened the capacity of many Kenyan firms to generate cash forcing them to cut back numbers on factory floors.

Now, it is anticipated that increased lending to households and businesses will spur consumer spending and boost production that will offer some room for resumption of hiring.

“We are not out of the woods yet,” said Prof Ndung’u explaining to reporters last week’s decision to lower the central bank rate (CBR) by 75 basis points to seven per cent. “The increased demand in credit is an indicator of increased economic activity.”

The upturn in lending is set to end support to the economy in the wake of a delayed release of a significant portion of the Sh22 billion economic stimulus package that was expected to put money into consumers’ pockets, and shore up demand for goods and services to jump start growth.

Though economists say the stimulus package was spot-on in identifying key sectors that must be supported to accelerate growth, bureaucratic red tape has made timely disbursement of funds nearly impossible.

In the US, the speedy flow of stimulus funds helped boost consumer spending, which was a key driver to US economy’s third quarter expansion of 3.5 per cent.

In the past three years, consumers have used a huge fraction of banking credit to buy goods such as cars, clothes and household appliances, hence supporting manufacturers and their expansion plans.

Some manufacturers who talked to Business Daily including the Eveready East Africa managing director said there were signs consumer demand is picking up.

“What I can confirm is that our products are moving faster than they were last year but I do not have the numbers yet,” said Mr Steve Smith.

The Eveready MD also said banks are now warming up more to businesses with “viable project proposals” that need financing.

Buffeted by effects of a prolonged drought, post-election violence and the global economic downturn, Kenya’s economic growth rate dipped to 1.7 per cent last year from 7.1 per cent in 2007.

Growth in the gross domestic product however rebounded to 3.9 per cent in the first quarter of this year, only to lose some of this momentum in the second quarter as the rate of expansion slowed down to 2.1 per cent.

Leading the recovery are tourism and building and construction sectors which have recorded highest growth while increased tea exports are helping to boost export earnings.

Prof Njuguna said the annual growth target of three per cent is still achievable, adding that the Monetary Policy Committee (MPC’s) assessment was that more credit needed to flow to the private sector to help achieve this mark.

High lending rates and collateral requirements have however limited flow of credit to businesses and individuals frustrating efforts to resuscitate economic growth.

The Central Bank has cut the CBR by two percentage points from nine per cent since June last year as a signal to banks to reduce their lending rates.

Prof Njuguna said the low inflation figures reported by the bureau of statistics provided borrowers with “a new weapon” to negotiate for lower lending terms from banks.

Kenyan bankers however say high operation costs, legal expenses incurred in recovering bad debts and high costs of mobilising deposits make it hard to align their lending rates to changes in the CBR.

“Banks take a lot more caution when (default) risks are perceived to be high,” said the Barclays Bank managing director Adan Mohammed last week.

Win confidence

Mr Mohammed said it is important for the bureau of statistics to maintain consistency in its measure and reportage of inflation in the economy to win the confidence of institutions that rely on the rate as a decision making tool.

The Kenya National Bureau of Statistics announced that overall inflation had plunged to 6.6 per cent in the month of October from a high of 17.9 per cent in September after adopting the new “geometric mean” method of measuring rate of change in prices of goods. “It is a decision will take into account when setting our rates,” said Mr Mohammed.