Low interest in Kenya fails to excite borrowers as banks hold Sh44b

Banks are sitting on billions of shillings as Kenyans shun borrowing despite a reduction in interest rates under the new rates-capping regime.

Latest Central Bank of Kenya (CBK) data shows the private sector failed to absorb Sh44 billion of available credit in the first three months of the current financial year.

CBK had projected that private sector credit would grow to Sh2.3 trillion between June and September. However, actual borrowing, which stood at Sh2.245 trillion in June, increased marginally to Sh2.258 in July and only grew by Sh2 billion in August to Sh2.260, according to the CBK monthly economic bulletin.

This will make it even more difficult to reach the targets set by the regulator for the current financial year given the depressed growth. CBK has projected that credit to the private sector would grow to Sh2.374 trillion in December, Sh2.431 trillion in March and Sh2.531 trillion by June.

“The annual growth in credit to the private sector is projected at 5.5 per cent in September 2016, 6.8 per cent in December, nine per cent in March 2017 and 12.4 per cent in June,” CBK Governor Patrick Njoroge wrote in the 38th Monetary Policy Statement sent to Treasury Cabinet Secretary Henry Rotich. The policy statement for June published last week explains why CBK has been cutting back the indicative rate of borrowing.

The policy team reduced the Central Bank Rate (CBR) from 11.5 per cent to 10.5 per cent in March and cut back further to 10 per cent in September. Most of the credit is being channelled to a few sectors of the economy, including agriculture, trade, transport and communication, building and construction and real estate, according to CBK. However, there was notable slowdown in credit growth to business services and manufacturing over the last one year.

During Equity Bank’s investor briefing, Chief Executive James Mwangi appealed to the public to go for loans after deposits grew by over Sh49.2 billion since September last year.

Kenya Commercial Bank (KCB) also saw a Sh45.7 billion growth in deposits in the past year. CBK Governor Patrick Njoroge said the Monetary Policy Committee -the decision making organ of Central Bank - was concerned that private sector credit was slowing down after the Government moved to reduce the cost of borrowing, with President Uhuru Kenyatta’s signing of the law capping interest rates.

The law effectively capped interest rates at four percentage points above CBR, currently setting it at 14 per cent. Analysts have questioned whether it has served as a remedy for lower cost of credit, given that banks have introduced additional fees for appraisals and negotiation, wiping out the marginal gains.

Kenya Bankers Association also insists banks are likely to adopt credit rationing towards secured loans, which will make it difficult for CBK to meet its projections and plans to grow the economy.