Lenders freeze loans as CBK cuts benchmark rate

Despite the Central Bank of Kenya (CBK) cutting its key lending rate, banks are tightening their lending standards, deepening concerns about the availability of credit to businesses and households.

The tightening of lending standards by banks is likely to have a negative impact on the economy, as businesses and households will find it more difficult to access credit. This could lead to a further slowdown in economic growth and a rise in unemployment.

CBK's Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) to 12.00 per cent from 12.75 per cent, citing a decline in overall inflation and the need to support economic activity.

However, banks have been reluctant to pass on the rate cut to borrowers, citing concerns about the rising cost of funds and the deteriorating quality of loan portfolios.

Banks have tightened lending practices despite recent cuts in the Central Bank Rate (CBR) aimed at stimulating economic activity.

The MPC announced a reduction of the CBR in August from 13.00 per cent to 12.75 per cent, hoping to foster growth amidst a backdrop of declining inflation and a revised growth forecast.

Despite the CBR reduction, commercial bank lending to the private sector has been decelerating sharply, with growth dropping to 1.3 per cent in August from 3.7 per cent in July.

The contraction is attributed to rising non-performing loans (NPLs), which currently stand at 16.7 per cent of gross loans, up from 16.3 per cent in June.

In the face of these pressures, banks have opted for a conservative approach. Many are hesitant to extend credit, fearing further increases in NPLs, particularly in sectors such as transport, trade, and real estate, which have already shown signs of strain.

"Our bank's risk management committee is closely monitoring the situation, and we are prioritizing liquidity and capital adequacy," stated one bank manager who requested anonymity.

Although optimism persists regarding business activity, respondents expressed concerns about the high cost of credit and subdued consumer demand.

"There's a disconnect between the policy intentions and what's happening on the ground," said independent economist Ian Nyoro. "Businesses are looking for loans to invest, but banks are tightening their belts."