- During this period, the CBK raised the base lending rate by 100 basis points from 10.5 percent to 12.5 percent, the highest since September 2012.
- Gross NPLs rose to 16.4% from 16.1% in April.
Image: EZEKIEL AMING'A
Credit to the private sector dropped to low levels last witnessed during the interest rate cap regime between 2016 and 2019, stifling the growth of businesses and job creation, according to the Central Bank of Kenya.
Data from the bank's Monetary Policy Committee (MPC), which on Wednesday eased the base-lending rate by 25 basis points to 12.75 per cent, shows credit to the private sector grew by four percent, just slightly above 3.7 percent reported between September 2016 and November 2019.
In September 2016, the government capped interest rates chargeable by banks at no more than four percent of the base rate (nine percent) set by the Central Bank of Kenya (CBK).
The cap was intended to address poor affordability and availability of credit to working people and was popular politically in a society where consumer debt levels are increasing.
This saw the private sector's credit decrease to 1.6 percent from a high of 25.4 percent in 2014.
The decision was however reviewed through the Finance Act 2019.
Speaking at the post-MPC media briefing, CBK governor Kamau Thugge largely blamed the reduction on volatilities in the forex market witnessed for the better part of last year and early this year, only touching on the impact of raised monetary policy in passing.
"This mostly reflects the depreciating exchange rate witnessed in 2023. This year, local currency loans to the private sector grew to 15 percent in December 2023 but decelerated to 10.2 percent in June as a result of tight monetary policy,'' Thugge said.
Data shows that credit to the private sector dropped from 13.8 percent in December last year to four percent.
During this period, the CBK raised the base-lending rate by 100 basis points from 10.5 percent to 12.5 percent, the highest since September 2012, when the rate was at 13 percent.
While partly agreeing with the apex bank, economists who spoke to the Star largely blame the drop on high base lending rates and high returns on government papers.
"We all appreciate that the forex issue played a part but a huge drop in growth witnessed since December points to a huge change increase in the base lending rate of 100 basis points. Banks also had to choose between earning a sure 18 percent from state papers and suffering defaults from squeezed businesses,'' an economist David Lamwenya told the Star.
Gabriel Muriuki, an economics scholar at Wits University in South Africa supported his view arguing that continued holding of the rate at 13 percent could have seen more firms either cut on jobs or close.
"The economy is shaking from the effects of several factors, including on-going anti-government protests, El Nino, shakeups in the geopolitical space, and high taxes. Inflation growth has eased to 4.3 percent from a high of close to 10 percent in 2023.''
He adds that easing of the tight monetary policy is in tandem with global trends, with the Bank of England lowering its main interest rate by 0.25 percent, to five percent, its first cut in over four years. The US is expected to follow suit.
High interest rates amid a slow economy made it difficult for businesses and households to repay loans, with the ratio of gross non-performing loans (NPLs) to gross loans standing at 16.3 percent in June 2024 compared to 16.1 percent in April.
The regulator is however attributing this to a decrease in gross loans between the two periods of 1.5 percent compared to a lower decrease in NPLs by 0.7 percent.
Even so, decreases in NPLs were noted in the real estate, manufacturing, trade and building, agriculture and transport and communication sectors.