Lenders continue to freeze loans as CBK cuts benchmark rate again

The Central Bank of Kenya (CBK) on Thursday cut its key lending rate for the third time this year again to stimulate credit to Kenyans.

This comes as banks continue to tighten their lending standards, deepening concerns about the availability of credit to businesses and households.

The tightening of credit by banks is having a negative impact on the economy, as businesses and households are finding it more difficult to access credit.

This has led to a slowdown in economic growth and a rise in unemployment.

The CBK’s Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) to 11.25 per cent from 12.00 per cent, citing a decline in overall inflation and the need to support economic activity. 

“The MPC noted that overall inflation was expected to remain below the midpoint of the target range in the near term, supported by low fuel inflation, stable food inflation, and exchange rate stability,” said CBK in a statement.

“Further, the MPC noted economic growth in the first half of 2024 had decelerated, and therefore concluded that there was scope for a further easing of the monetary policy stance to support economic activity, while ensuring exchange rate stability.

"Therefore, the committee decided to lower the Central Bank Rate (CBR) from 12.00 per cent to 11.25 per cent.”

This is the third time in as many months that the CBK is cutting its key rate amid concerns of the credit freeze to the economy.

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 CBR aimed at stimulating economic activity.

The MPC had earlier lowered the Central CBR to 12.00 per cent from 12.75 per cent in October citing a decline in overall inflation and the need to support economic activity. 

The MPC had similarly earlier announced another 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 successive CBR reductions 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.

“Commercial bank lending to the private sector remained broadly unchanged in October 2024 compared to the previous year, partly reflecting exchange rate valuation effects on foreign currency denominated loans following the appreciation of the Shilling, and reduced demand attributed to high lending interest rates.

“Growth in local currency-denominated loans stood at 4.0 per cent in October, with the foreign currency-denominated loans, which account for about 26 per cent of total loans, contracting by 11.8 per cent,” said MPC.

The ratio of gross non-performing loans (NPLs) to gross loans stood at 16.5 per cent in October 2024 compared to 16.7 per cent in August. Decreases in NPLs were noted in the manufacturing, energy and water, financial services and agriculture sectors.

Banks have continued to make adequate provisions for the NPLs.

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.