Commercial banks are lending to private sector at the lowest pace in more than a decade, leaving key economic and job growth drivers such as manufacturing and agriculture struggling for funding, newly released data shows.
The Central Bank of Kenya (CBK) data shows that lending to the private sector expanded by a paltry 3.3 per cent in the year to March 2017, the lowest growth rate since January 2005.
Banks insist last September’s capping of interest rates is to blame for the credit squeeze, having cut their lending to riskier customers such as SMEs.
But the CBK data shows that the slowdown in credit expansion began a couple of months before the rate cap law came into force last September — having dropped to single digit levels in June 2016.
Some analysts feel the CBK, which has maintained the base rate at 10 per cent since the capping law came into force, is right to stay out of the fray, insisting cheaper credit may not translate to more lending to sectors of the economy that is being sidelined.
“Credit growth contraction is worrying but for now the CBK is right to stay sidelined. It is not clear that cheaper credit would translate to lending to the sectors that are being credit-starved,” Aly-Khan Satchu, an independent analyst said.
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The central bank considers a 12 to 15 per cent growth of lending ideal for robust economic expansion.
In absolute terms, total credit to the private sector stood at Sh2.288 trillion at the end of March 2017, compared to Sh2.22 trillion 12 months earlier.
This has, however, contracted by Sh12.6 billion since January.
The data is particularly worrying given the contraction of credit was most pronounced in manufacturing, agriculture and business services that have a large number of SMEs and are key drivers of job creation.
Credit to manufacturing dropped by 7.8 per cent in the year to March to stand at Sh279.9 billion, agriculture was down 9.3 per cent to Sh85.3 billion while business services declined 15.6 per cent to Sh145.7 billion.
Trade, private households, real estate and transport, however, recorded expansion of credit.
Although agriculture accounts for just four per cent of total private sector credit, it accounted for 32.6 per cent to GDP last year, the largest segment of the Kenyan economy.
The CBK said last month that lending to micro, small and medium sized enterprises (MSMEs) fell by 5.7 per cent between August and April, saddled by deep cuts by the big banks.
The continuing credit squeeze is also raising concern over the health of the banking sector itself.
Analysts believe the ongoing cut in lending to the private sector is not sustainable and has the potential of stifling growth and financial mediation in the economy.
Standard Investment Bank analysts said in a recent note that while banks showed signs of earnings stability at the end of quarter one, continued credit rationing was bound to start weighing on margins and profits.
A number of lenders are already cutting jobs and closing branches as interest margins, a key source of income, continues to fall.
Bankers, however, insist that they are alive to the fact that the business models have to change if they are to survive under the rate cap regime that is unlikely to be reversed in an election year.
“This is not sustainable, and the only way is for banks to relook their business models,” said Kenya Bankers Association chief executive Habil Olaka.
“This is why we are seeing rationalisation of branches and migration to mobile transactions that are cost-effective and enables them to sustain operations within the rate cap regime.”
Government lending up
The CBK data also shows that while private sector credit growth has fallen, banks have significantly increased their lending to government.
Credit to government grew 7.1 per cent on an annualised basis at the end of March, recovering from negative growth in the second half of 2016.
Credit to other public sector borrowers such as parastatals and local (county) government units grew by 28.3 per cent in the period.
Lending to government as an alternative to the private sector has its limits, however, given that the Treasury has a set domestic borrowing target each fiscal year.
Inevitably therefore, some banks will be crowded out of the public lending space, forcing them back to private sector loans.