Private sector lending slumps to record low, affects money supply

The amount of money in Kenya’s economy dropped by half in 2024 as credit growth to the private sector fell to four per cent, equivalent to Sh3.8 trillion.

Industry data released by the Central Bank of Kenya (CBK) shows there was a general slowdown in credit growth both to the private sector and the government.

This was a drop from 12.2 per cent growth recorded in the previous financial year, which the CBK partly attributes to exchange rate valuation effects on foreign currency-denominated loans.

This marks the third year in a row that credit growth to the private sector has dipped.

“Annual growth in money supply, M3, declined to 6.8 percent in FY 2023/24 from 13.4 percent in FY 2022/23, mainly due to a slowdown in lending to the private sector and net lending to government,” reads the CBK report.

Money supply—M3 refers to a broad measure of a country’s money supply, which includes the total amount of money available in the economy.

It encompasses various types of money, ranging from physical cash to more liquid and less liquid forms of assets.

According to the CBK Annual Report and Financial Statements for 2023/24, the manufacturing sector recorded the steepest decline, falling from 18 per cent to -0.6 per cent during the review period.

Trade dropped from 12.5 per cent to one per cent, building and construction plummeted from 4.8 percent to -8.3 percent, while transport and communications fell from 19.9 percent to 4.4 percent.

“On the liability side, the reduction in money supply was reflected in reduced growth in deposits, mainly attributed to valuation effects on foreign currency deposits following exchange rate appreciation,” CBK noted.

The Central bank noted that despite the overall decline in credit growth, some sectors posted positive growth. For instance, credit to business services increased from 5.5 per cent to 8.3 per cent, while other activities rose slightly from 8.7 per cent to 8.8 per cent.

“Growth in private sector credit moderated to 4.0 percent in FY 2023/24 compared to 12.2 percent in the previous financial year, partly reflecting exchange rate valuation effects on foreign currency-denominated loans,” the report noted.

Foreign currency loans accounted for about 26 percent of total credit to the private sector, predominantly in manufacturing, trade, and transport and communication, which experienced significant declines.

Growth in net lending to government also declined to 9.8 per cent from 13.0 percent in the prior year, according to the report.

In the period under review, the rate of loan default in Kenya hit a 17-year high of 14.8 per cent with the smaller banks most affected, according to the Kenya Bankers Association (KBA).

2024 saw the Kenyan shilling face significant depreciation against major currencies such as the US dollar during the year, driven by the maturity of a Eurobond and elevated interest rates in advanced economies, which strengthened their currencies.

The local unit, however, regained stability after Kenya successfully repaid the Eurobond before its maturity and secured dollar-denominated loans from global lenders.

CBK Governor Kamau Thugge attributed the currency stabilization to a higher Central Bank Rate (CBR), which was raised from 12.5 per cent to 13 percent to curb inflation and support the shilling.