New headache for CBK as banks freeze loans and resist lower rates

The Central Bank of Kenya (CBK) is grappling with a new headache as banks continue to freeze loans and exhibit reluctance in lowering lending rates despite the latest reduction in the Central Bank Rate (CBR). 

Thursday marked the third time this year that the regulator has cut its key lending rate, setting it at 11.25 per cent in an effort to stimulate credit access for Kenyans. 

Speaking during a post-Monetary Policy Committee (MPC) briefing yesterday, CBK Governor Kamau Thugge stated: “The committee observed that short-term rates on government securities had declined sharply in line with the CBR, but banks had not responded by lowering their rates proportionately.” 

“Therefore, the MPC urges the banks to take necessary steps to lower their lending rates in order to stimulate credit to the private sector and thereby encourage more economic activity.” 

This latest cut comes amid growing concerns over banks tightening their lending standards, which further exacerbates the already critical issue of credit availability for businesses and households.

The credit-tightening practices are not only limiting access to funds but are also contributing to a slowdown in economic growth and an increase in unemployment. 

In a statement, the MPC - CBK’s decision-making organ - cited a decline in overall inflation as a key factor for the rate cut, noting, “Overall inflation is expected to remain below the midpoint of the target range, supported by low fuel inflation, stable food prices, and exchange rate stability.”

However, despite these favourable indicators, the MPC acknowledged that economic growth had decelerated in the first half of 2024, necessitating a further easing of monetary policy. 

Despite these efforts, banks remain hesitant to pass on the benefits of the rate cut to borrowers. Many lenders are citing rising costs of funds and deteriorating loan portfolios as primary reasons for their conservative lending stance.  

The reluctance is particularly evident in light of rising non-performing loans (NPLs), which have surged to 16.7 per cent of gross loans, up from 16.3 per cent in June. 

Compounding the issue, commercial bank lending to the private sector has sharply declined, with growth dropping to just 1.3 per cent in August from 3.7 per cent in July.

This contraction reflects not only the banks’ tightened lending standards but also reduced demand due to high interest rates. 

The MPC’s earlier rate cuts—first to 12.00 per cent from 12.75 per cent in October and then from 13.00 per cent to 12.75 per cent in August—were aimed at fostering growth against a backdrop of declining inflation. Yet the results have been disappointing, as lending remains stagnant.  

The latest CBK data reveals that local currency-denominated loans grew at a modest 4.0 per cent in October, while foreign currency loans, accounting for approximately 26 per cent of total loans, contracted by 11.8 per cent. 

This scenario is indicative of a broader trend where banks are prioritising risk management over lending, particularly in vulnerable sectors such as transport, trade, and real estate. 

In response to these pressures, banks have adopted a cautious approach, making adequate provisions for NPLs while remaining wary of further credit extensions.  

Experts say that as the CBK continues to cut rates in hopes of stimulating the economy, the challenge remains how to incentivize banks to extend credit and lower lending rates to revitalize economic activity. 

Save for a few major banks like Equity Group, most lenders have been slow to pass these rate cuts onto borrowers, citing concerns over rising funding costs and the quality of their loan portfolios. 

The tightening of lending standards by banks is hurting the economy, as businesses and households are finding it more difficult to access credit. 

This is leading to a further slowdown in economic growth and a rise in unemployment dealing a blow to government efforts to boost liquidity and access to capital for individuals and businesses.  

Newly appointed National Treasury Cabinet Secretary John Mbadi sees lower interest rates as a key driver for increased economic liquidity. This could stimulate growth across various sectors, especially as Small and Medium Enterprises (SMEs) gain greater access to credit.