Kenyan banks have in recent years taken substantial loans from global funds, including the International Finance Corporation (IFC), European Investment Bank (EIB), Agence Francaise de Developpement (AFD) and the African Development Bank (AfDB), attracted by relatively more favourable terms of debts like lower interest rates and longer maturity.
The CBK last month issued the highest key lending rate hike in seven years, raising the benchmark rate by 100 basis points from 9.5 per cent to 10.50 per cent.
"I think, as I explained, the information that the Monetary Policy Committee had when they made that decision to retain the rate of 9.5 per cent was that it looked like inflation was actually coming down, it had come down from 9.2 to 7.9 per cent. And even non-food and non-fuel inflation had also declined," CBK Governor Kamau Thugge told reporters during his first post-Monetary Polity Committee (MPC) briefing last month.
The rate hike left borrowers staring at a big jump in their monthly loan repayments.
It is against this backdrop of a tightening local credit market that concessional long term facilities sourced from multilateral development institutions become increasingly critical, as Co-op Bank has done with DEG.
The tightening of liquidity is expected to have a negative effect on access to credit for individuals and companies, with borrowers set to feel the financial pain of the increased cost of loans.
This could translate into banks tightening their lending standards.
The sharp rise in interest rates already threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring.
If lending dries up, that could weigh down on the value of stocks, real estate and other assets besides crimping overall demand-a recipe for a painful recession.
At the same time, higher rates have increased borrowing costs.
This is a concern for banks because borrowers faced with elevated costs may not be able to repay and service their loans, laying the groundwork for banks to toughen their lending.