Central Bank says credit uptake to grow

 NAIROBI, Kenya

Kenya’s sound political environment and recent drop in Central Bank rate are expected to push up demand for credit. The two factors, among others, affected demand for credit in the East African nation in the first quarter of this year. Banks tightened their purses during the period awaiting the outcome of the March 4 elections.

“The prevailing political risk associated with the March 4 elections dampened demand for credit as investors delayed investment decisions until the political environment stabilized,” said a Central Bank of Kenya (CBK) credit survey on Tuesday. The volatile political environment in the period during the run- up to elections led to decreased demand for credit in all sectors by 50 percent. Top on the list of the sectors was agriculture, trade, tourism, manufacturing, energy and real estate.

“Most institutions attributed this decrease to political risks, which had created uncertainty in the business environment,” said CBK. The general decline in demand for credit in the quarter was a reversal of the status in the quarter ending December, which reported a general increase in demand for loans in nine out of the eleven economic sectors. CBK further noted over 50 percent of the 43 commercial banks polled in the survey tightened their credit standards due to political risks during the period.

“Fifty-four percent of respondents cited political risk as the major factor that necessitated the tightening of their credit standards.” On the other hand, CBK rate during the period stood at 9.5 percent. While this was lower compared to previous periods, banks maintained their interest rates at an average of 18 percent.Interest charges, according to data from Kenya National Bureau of Statistics, was 18 percent in January, before dropping to 17.8 percent February and 17.5 percent in March. The high interest rates, coupled with high political risks, contributed to an increase in non-performing loans (NPL) during the quarter in review.

“Gross NPLs increased by 14.1 percent from 733 million U.S. dollars in December to 836 million dollars in March,” said CBK. Now, these factors that pushed down demand for credit in the East African nation in the first three months of this year have been mitigated. Kenya held elections on March 4 and transited peacefully to a new administration leading to elimination of political risks.This has created a positive macroeconomic environment for business to thrive in all sectors of the economy, including agriculture, tourism, trade and real estate. Commercial banks are positive about the economic outlook and are looking forward to improved business and rise in demand for credit.

“The institutions have forecasted an increase in the demand for credit going forward following peaceful elections, which have restored business confidence,” noted the CBK survey.The banks expect NPLs loans to decline in some sectors and remain unchanged in others in the quarter ending June. “Some institutions forecast a decrease in NPLs in tourism, restaurant and hotels and trade sectors. In some, however, the banks forecast NPLs will generally remain unchanged,” said CBK.

The institutions will in this quarter, therefore, intensify credit recovery efforts in manufacturing, building and construction, trade, transport and communication, real estate and personal sectors. CBK early this month cut its bench-mark rate for the first time this year by one percentage point to 8.5 percent. This was a signal to commercial banks to lower their lending rates to push up demand for credit and spur economic growth in the East African nation.

The CBK rate is crucial since it determines banks’ lending charges. The regulator lends commercial banks money at the rate during emergency borrowing window. While at least one bank has responded to CBK move to cut the lending rate by announcing it will lower its charges starting June, it is expected that others will follow, making loans affordable in the East African nation. Other factors expected to affect demand for credit are issuance of government debt securities, loans from non-bank institutions and banks internal financing. (Xinhua)