The shift to risk-based pricing by banks has led to a reduced appetite for new loans, resulting in higher non-performing loans (NPLs), a new survey by the Central Bank of Kenya has shown.
This has in turn led to an overall drop in loan uptake, which is expected to continue until the end of the last quarter of 2024.
CBK's latest perception survey on commercial banks indicates that credit growth is expected to slow down by the end of 2024, compared to the same period in 2023.
Alongside the risk-based lending, the report says the slower growth has also been attributed to high lending rates, the strengthening of the local currency impacting foreign currency loans, and earlier interventions by the Central Bank of Kenya (CBK), which pushed banks to raise the cost of loans.
“CBK interventions, which exerted pressure to increase the price of loans amidst the implementation of risk-based pricing by banks, slowed down the pace of the uptake of new facilities, resulting in high non-performing loans and hence reduced business appetite,” reads the survey.
According to the Monetary Policy Committee, the rate of loan defaults in Kenya has hit records last seen over 18 years ago as the fiscal policies meant to cushion the country from high inflation take a toll on the banking industry.
This has seen the ratio of gross non-performing loans (NPLs) to gross loans stood at 16.7 percent in August 2024 compared to 16.3 percent two months earlier.
Essentially, this means that out of every Sh100 that banks have loaned out, Sh16.7 of those loans were not being paid back as agreed in the month August 2024, showing how Kenyans are struggling with servicing debts.
Banks also pointed to recent protests in the country, which have delayed investments, as well as a more cautious approach to lending to mitigate the risk of default.
Despite these challenges, banks expect an improved macroeconomic environment and business conditions to support private sector credit growth in the remaining months of the year.
Additionally, demand for credit is anticipated from key sectors for working capital, new opportunities, and short-term borrowing to ease financial constraints. The survey further revealed that credit demand during August and September 2024 increased due to seasonal factors, with 73 percent of respondents expecting demand to rise further in October and November, driven by high spending during the festive season.
However, the relatively high cost of credit is expected to temper demand, with 75 per cent of respondents noting that corporates have adopted a "wait-and-see" approach.
“About 55 percent of the respondents expected credit demand to be driven by increased short-term borrowing to reduce working capital and capital expenditure constraints for businesses and for financial support to individuals and households,” read the report in Part.
On the broader economic outlook, 82 percent of respondents forecast slower economic growth in 2024 compared to 2023 but expect it to remain resilient.
This optimism is supported by strong agricultural performance, driven by favourable weather conditions and government input subsidies.
Additionally, 66 percent of respondents expect growth to be bolstered by a robust services sector, while 55 percent pointed to the easing of monetary policy amid low inflation and a stable currency.
However, 77 percent of respondents identified key risks to economic growth, including limited government spending following the Finance Bill and subdued consumer spending due to reduced purchasing power.
The recent protests and business interruptions are also expected to dampen growth prospects. In terms of employment, the survey showed mixed hiring expectations across bank and non-bank firms.
About 76 percent of banks plan to increase their workforce in 2024, driven by business growth, branch expansion, and product launches.
In contrast, only 38 percent of non-bank firms anticipate hiring more employees, citing high production costs, low-profit margins, business uncertainty, and the need to control overheads amid reduced demand.