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State crowds out households and firms from credit market

By Dominic Omondi | April 3rd 2021
The National Treasury building. [Elvis Ogina, Standard]

The government seems to have pushed the private sector from the domestic credit market in the nine months to January this year. 

Analysis of data from Central Bank of Kenya (CBK) shows that banks moved close to Sh526 billion to the National Treasury’s coffers while the private sector only received Sh232 billion. 

This period, when the country was grappling with the Covid-19 pandemic, was among the few times when the government has received more loans from banks than firms and households.

Between February last year and January, credit to the government grew by 13.9 per cent compared to the private sector’s 8.6 per cent.

A tough business environment occasioned by the pandemic saw a lot of businesses close even as workers were retrenched.

The government also dipped into the domestic market as it sought money to fight the health and economic effects of the pandemic.

Year-on-year private credit grew by a high of 9.3 per cent to January, which picked up in February to 9.7 per cent, the highest growth since June 2016.

Although there was an increase in credit growth to the private sector, public sector credit grew faster.

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To incentivise banks to lend cheaply to the private sector, CBK lowered its benchmark lending rate, the Central Bank Rate, to seven per cent from 8.25 per cent in the pre-pandemic period.

Nonetheless, banks avoided lending to the private sector due to the volatile business environment that saw businesses shut down and millions of workers lose their jobs.

Consequently, the National Treasury came up with a credit guarantee scheme aimed at encouraging banks to lend to risk borrowers.

Having enacted regulations on the credit guarantee scheme, which is aimed at lowering the risk for banks lending to small businesses without collateral, Treasury expects lending to the private sector to increase.

The Kenya Mortgage Refinance Company (KMRC), which Treasury Cabinet Secretary Ukur Yatani said will be instrumental in maintaining adequate liquidity among primary housing mortgage providers (banks and Saccos), will also play a critical role in the credit guarantee scheme.

"This new company is also expected to play a significant role in the structuring of the proposed National Credit Guarantee Scheme in order to create an effective backstop mortgage guarantee component to cover the losses incurred by lenders on future home loans,” said Mr Yatani in his Budget speech.

A big chunk of the government’s Sh156.7 billion stimulus cash designed to keep the economy afloat during the Covid-19 pandemic largely remains locked in bank accounts.

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