High interest rate charges impede demand for loans

By Jackson Okoth

Demand for credit in the quarter ended June increased in manufacturing and personal and household sectors, but reduced for building and construction and real estate sectors.

This is according to a credit officer survey reported for the quarter ended June, by the Central Bank of Kenya.

Further, demand for credit in the agriculture, mining and quarrying, tourism as well as energy and water sectors remained largely unchanged in the second quarter of this year.

Cost of borrowing

The CBK survey indicated that cost of borrowing was the greatest factor that led to a decrease of demand for credit. This was followed by growing preference for potential borrowers to finance expansion and operations from retained earnings as opposed to credit.

In its findings, the survey reports that 39 per cent of the respondents expect non-performing loans (NPL) in the personal and household sectors to increase. But this is a drop from 64 per cent of the respondents in the March survey who expected NPLs in personal and household sector to increase.

This was also observed in the real estate sector where 35 per cent of respondents expect the NPLs to rise in the June  survey as compared to 66 per cent who expected NPLs to increase in March.

The lower NPL forecast could be informed by the lowering of Central Bank Rate (CBR) from 18 per cent to 16.5 per cent, which is likely to translate to lower lending rates and hence lower default rates.

An earlier survey in March forecasted an increase in NPLs in trade, real estate, personal and building and construction sectors. The June data on actual NPLs supported this forecast except for building and construction sector, which recorded a decrease in NPLs.

New land laws

The forecast of NPLs increase in building and construction sector was based on assumption that new land laws would negatively impact the loans in the building sector.

In the quarter ended  June 30, the banking industry’s aggregate balance sheet increased by 4.8 per cent from Sh2.1 trillion in March  to Sh2.2 trillion in June.

Gross loans and advances expanded by 4.0 per cent from Sh 1.24 trillion in March to Sh1.29 trillion in June.

Deposits grew by 6.4 per cent from Sh1.56 trillion in March to Sh1.66 trillion in June, while total capital increased by 4.8 per cent from Sh280.9 billion in March and S94.3 billion in June.