Why cheap credit may never come soon for the private sector

The expectation that banks will unclench their fists and extend more credit to the private sector as the new year starts due to the reduced Central Bank Rate (CBR) may not come to pass.

This is even as the CBR inches to the possible single digit where it was last in June 2023, at 9.5 per cent. It is expected that more money will be accessed by businesses that have struggled for the better part of 2024 with expensive loans.

However, a survey by the Central Bank of Kenya on market perception shows that while further reduction of the CBR could lead to even cheaper credit, there is concern that this may never extended to businesses.

This is even as the survey shows an expectation of business recovery due to low fuel inflation, the emergence of Public-Private Partnerships (PPPs), and stable food inflation.

The Central Bank of Kenya (CBK) Monetary Policy Committee (MPC) has reduced the CBR rate by 1.25 per cent this month compared to December 2023.

However, this rate was 13.00 per cent in February 2024 - a 1.75 per cent drop compared to the latest review. The 13.00 per cent rate shot credit towards 20 per cent with some products such as mortgages surpassing the 20 per cent mark.

Exchange rate stability

In the latest review released December 5, 2024, the Committee revised the rate down to 11.25 per cent from 12.00 per cent a drop of 75 percentile points.

CBK Governor Dr Kamau Thugge, who is the chairperson of the MPC attributed the drop to exchange rate stability, low fuel and food inflation. Data had also shown that economic activities had decelerated in the first half of the year.

When increasing the rate on December 5, 2023, from 10.50 per cent to 12.50 per cent, Dr Thugge referenced the inflation rate that was 6.8 per cent then, the increase in public sector debt as the country struggled to settle the Eurobond and the depreciating shilling that was exchanging at Sh153 to the dollar. The rate has now eased to Sh129 to the dollar while inflation for November 2024 remained at 2.8 per cent. Yet despite these fair numbers, businesses are unlikely to benefit from cheap loans.

The CBK Market Perception Survey reveals that banks expect that falling interest rates will boost demand for loans, particularly short-term facilities.

They also highlighted that the growing use of digital platforms and fintech solutions could simplify credit access and extend services to underserved markets.

“However, respondents identified the high Non-Performing Loans (NPLs) as a potential risk to private sector credit in 2025, primarily due to tight requirements adopted by banks, which discourages prospective borrowers from taking on additional loans,” the survey reads. The survey sought responses from 354 private sector firms including 38 commercial banks, and 302 non-bank private firms among them 84 hotels.

The risk-based pricing model for credit and the challenging business environment are among the issues the respondents highlighted which will impede access to credit.

This is even though 80 per cent of the respondents cited that the key macroeconomic variables are well aligned with growth in 2025.

The low inflation, stable shilling and effects of MPC’s easing of the CBR are expected to boost demand in the domestic economy.

“In addition, 39 per cent of the respondents were optimistic that the stable political climate coupled with State policies would promote production while 50 per cent of the respondents expect the strong performance of the agricultural, tourism, and ICT sector to boost economic growth,” survey says.

It adds: “However, 88 per cent of the respondents noted that the main risks to this optimism were high taxation, which has strained household budgets, reducing demand and economic activity and 50 per cent of respondents were concerned about the elevated public debt and austerity measures by the government.”

According to the Thirty-Third Bi-Annual Report of the Monetary Policy Committee dated October 2024, growth in local currency lending stood at 4.0 per cent in the month with foreign currency, which accounts for 26 per cent of loans, contracted by 11.8 per cent.

The report says the reduction in credit growth was reflected across key sectors of the economy, including manufacturing, transport and communications, and building and construction.

Most of these sectors borrow in foreign currency.

“Subdued growth in private sector credit is expected in the near term,” the report says.

“Recovery is expected in 2025, partly reflecting the impact of the recent easing of monetary policy stance and resilience in economic activity to support credit demand for working capital requirements.” In the report, the MPC notes increased credit risk due to NPLs. It notes that the ratio of NPLs to gross loans stood at 16.5 per cent, an increase from 16.1 per cent reported in April 2024.

“Credit risk was elevated, with ratio of gross NPLs to gross loans standing at 16.5 per cent in October 2024, an increase from 16.1 per cent in April 2024,” the report says.

The increase was attributed to the transport and communication, building and construction, personal and household, and trade sectors.

“Gross NPLs increased by 1.9 per cent from Sh662.2 billion in April 2024 to Sh674.9 billion in October 2024 mainly due to challenging business environment,” the report says.