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Why Kenya might not sustain 6 percent growth rate

By Reuters | Published Tue, November 6th 2018 at 11:25, Updated November 6th 2018 at 11:31 GMT +3
James Mwangi, Equity Group’s CEO

Kenya might be unable to sustain its economic growth rate of about 6 percent per annum due to poor credit growth caused by a cap on commercial lending rates, the chief executive of Equity Group said on Monday.

East Africa’s richest economy capped the rates at 4 percentage points above the central bank rate in 2016, with authorities saying they wanted to help small traders access capital at affordable rates.

ALSO READ: Cash from abroad boosts Equity’s third quarter profit

But the move has had the opposite effect. The central bank governor said in September the cap is strangling the economy and banks say they cannot properly price risk to small and medium enterprises (SMEs) while the cap is in place.

That has sent annual private sector credit growth tumbling to 4 percent from double digits before the cap, prompting the warning by Equity, which is one of the top lenders.

“There is no way you can grow an economy at 6 percent and you are funding it at a growth rate of 4 percent,” James Mwangi, Equity Group’s CEO said at an investor briefing.

An attempt by Finance Minister Henry Rotich to repeal the cap in June to boost credit growth was blocked by lawmakers on the grounds that banks would not regulate themselves to offer lower rates to consumers.

Equity posted an 8 percent rise in pretax profit for the nine months to the end of September, as interest income grew and profit from its regional businesses like in the Democratic Republic of the Congo grew at a faster pace.

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The lender, which also operates in Uganda, Tanzania, South Sudan and Rwanda, said profit rose to 22.4 billion shillings ($221 million) from 20.7 billion a year earlier, while interest income rose 9 percent to 38.5 billion shillings, Mwangi said.

Equity’s shares rose 1.27 percent after the results.

The regional businesses had contributed 18 percent of profit for the period, from the previous year’s 14 percent, the lender said.

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Its total bad debts jumped to 8.7 percent, from 7.4 percent a year earlier, Equity said without providing details. The bad debts were however significantly below the sector average of nearly 13 percent.


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