High interest rates hold back construction sector

BY FREDRICK OBURA

As the year draws to a close, Kenyans will remember 2012 as a year when the cost of borrowing was beyond the reach of many. At some point in the course of this year, interest rates on loans by commercial banks averaged at between 25 and 30 per cent, making it one of the most difficult years for borrowers.

Sectors such as construction were worst hit with a decline in performance as released by the Kenya National Bureau of Statistics (KNBS) in the country’s third quarter report.

According to KNBS, the construction industry is estimated to have expanded by 0.6 per cent during the third quarter of 2012 compared to a growth of 3.6 per cent in a similar period last year.

The considerable slowdown in the activities of this sector was mirrored in the production and consumption of cement whose growths slowed to 0.6 per cent and 1.5 per cent during the third quarter compared to expansions of 8.9 and 7.7 per cent, respectively over a similar period last year.

The report attributes the slowdown in the activities of the construction sector to the prevailing high interest rates. High interest rates that prevailed during this year were on account of the Central Bank’s sustenance of a tight monetary policy stance. The regulator raised borrowing costs to 18 per cent in a bid to contain runaway inflation that had peaked at 19.7 per cent towards end of last year.

Benchmark-lending rate

In 2012, slowing inflation gave the central bank leeway to cut its benchmark-lending rate for the first time in 18 months on July 5, followed by two more reductions, which have lowered it to 11 per cent.

The gesture by the regulator to bring down the rates is yet to trickle down to consumers; commercial banks have maintained high interest rates slowing the uptake of credit from consumers wary of the consequences. In a credit report officer survey released in June by the Central Bank of Kenya, 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.

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.

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.

The high interest rates with some banks charging as close to 30 per cent did not miss the attention of parliament with members seeking to control the rates for the benefits of consumers.

First attempt by Jakoyo Midiwo also Government Joint Chief Whip to introduce amendments to the Finance Bill was however defeated.

Opponents of interest rates control argued that such controls would make Kenya unattractive to foreign investors and restrict lending on the domestic front to a small fraction of potential borrowers who are less risky to the banks.