Financial sector’s performance dips on reduced lending

The financial sector posted the slowest growth in a decade as the economy was starved of credit in reaction to interest capping laws.

According to the 2018 Economic Survey, the sector’s growth 'decelerated significantly' to 3.1 per cent in 2017 from 6.7 per cent recorded the previous year.

“This was mainly accredited to weak performance of the economy, tightening of lending due to interest rate cap, and increased use of alternative funding,” said Kenya National Bureau of Statistics (KNBS) Director General Zachary Mwangi.

Last year’s pace of growth is the slowest since the 2.7 per cent that was posted in 2008 as the country struggled to rise from the aftermath of a violent election that left the economy in tatters.

Banks reacted to the interest rate cap by cutting their lending to key sectors even as they found a widened window to lend to the Government.

According to KNBS data, domestic credit by the banking system rose by 7.9 per cent to Sh3.25 trillion. However, most of the growth was due to lending to the Government.

Credit to the national government grew by 27.4 per cent to Sh755.7 billion from Sh592.7 billion the previous year. This was more than double the pace it grew in 2015-2016.

Many bank chief executives have claimed that they had to lend more to the Government as they avoided borrowers whose risk was beyond the maximum 14 per cent that the law allowed them following the capping.

Lending to the private sector expanded by 3.1 per cent to Sh2.5 trillion, leaving many entities starved of credit.

Businesses in agriculture, mining, quarrying, transport, storage, and communication recorded negative growth in credit.

The commercial banks’ average interest rates charged on loans and advances was 13.64 per cent in December 2017, down from 13.69 in December 2016.

However, the survey shows that real interest rates on loans increased from 7.34 per cent to 9.14 per cent in the same period.

Real interest rate is what an investor, saver, or lender receives or expects to receive after allowing for inflation.

Speaking during the launch of the survey, National Treasury Cabinet Secretary Henry Rotich said the slowed private sector credit had impacted negatively on the overall growth trajectory. In recent years, credit to the private sector has expanded by as high as 20 per cent.

“It is very clear from the statistics that the cap may have had some impact on the performance of the economy, especially on credit to private sector,” he said.

Mr Rotich said the ministry was developing a legal framework to present to Parliament, which he said he believed would help better manage credit in the economy.

“It is not just cost of credit but also the issue of consumer protection based on market conduct,” he said.

The CS added that his team would put forward a package of reforms to address the real cause of high cost of credit and 'hopefully that should eliminate the cap'.

“That process is ongoing and we will be submitting amendments on credit management in June when I will be presenting the budget,” he said.