Growth in lending by banks to the private sector slowed to a 22-year low of 0.4 percent in September, piling pressure on the Central Bank of Kenya (CBK) to lower its base rate despite concerns by the International Monetary fund that this could trigger fresh inflationary pressure.
The expansion in loans to households and businesses has been slowing down for nine consecutive months to a level last seen in September 2003 (-0.6 percent), threatening growth of the economy.
The private sector depends on loans from banks to fund new investments and support consumption—key ingredients in expanding GDP.
The CBK sees private sector credit growth of between 12 and 15 percent as ideal to power healthy growth of the economy.
Borrowers have, however, been discouraged from taking up new loans due to high interest rates, which have also raised the rate of defaults and made banks tighten their lending terms to protect the quality of their loan books.
Bankers and the National Treasury have, however, called for a deeper cut, arguing that inflation has fallen below the mid-point of the target range and the shilling exchange rate has stabilised, while also pointing to the slower GDP growth of 4.6 percent in the second quarter of the year compared to 5.6 percent in quarter two of 2023.
“Recovery (of private sector lending) is dependent on liquidity, where we have seen the government committing to paying pending bills and disbursements to the counties. The second thing is interest rates, when they come down, people are willing to borrow and invest, because they can afford the capital,” said NCBA Group chief executive officer John Gachora, who is also Kenya Bankers Association chairman.
The CBK last month cut its base rate by 0.75 percentage points to 12 percent, adding to an earlier slash of 0.25 percentage points in August, partly in an effort to stimulate lending and cut the volume of non-performing loans for banks.
CBK governor Thugge, in a briefing following the October 8 monetary policy committee meeting, said the sharp reduction in CBR was meant to encourage banks to lower their lending rates so that they could reduce NPLs and encourage borrowing by the private sector.
He also backed the view that there was room to cut rates further in order to support the economy, saying that the CBK did not foresee any significant outflow of foreign exchange if banks adjust their lending rates down to incentivise borrowers.
The consensus among local players that a rate cut is necessary has, however, met some resistance from IMF, which cautioned in a country report on Kenya that easing monetary policy risks bringing back high inflation once money supply in the economy goes up.
The global lender said the current tight monetary policy stance “remains appropriate given risks to price stability and external sustainability”.
The institution said Kenya’s core (non-food-non-fuel) inflation remains above a level that the CBK considers appropriate for its price stability objective.
Headline inflation fell to a 17-year low of 2.7 percent in October, due to lower prices of fuel and selected food items. Core inflation stood at 3.3 percent, slightly lower than September’s 3.4 percent and 3.5 percent in August.
While the CBK has a target of five percent plus or minus 2.5 percentage points for overall inflation, it doesn’t have an official target for core inflation, even though it is said to prefer that this inflation goes no higher than three percent.
