BORROWING RATE

CBK retains lending at 13 per cent

Parliament has until March 2020 to make changes on the cap after High Court ruling as unconstitutional

In Summary

•The Central Bank of Kenya has retained the benchmark lending rate a nine per cent, indicating a subdued crunch on credit access to the private sector.

•Its retention comes as banks await repeal of the internet rate caps; they have cut their loan disbursement to the small borrowers to reduce their risks involved with defaults.

The Central Bank of Kenya.
INTEREST RATE CAP: The Central Bank of Kenya.
Image: FILE

The Central Bank of Kenya has retained the benchmark lending rate at nine per cent, indicating a subdued crunch on credit access to the private sector.

The Monetary Policy Committee said on Wednesday the Central Bank-set rate since July 2018, will remain in place, meaning banks cannot charge more than 13 per cent.

The interest rate cap, which came in force in September 2016 caps commercial bank lending at four per cent above the CBR.

 

Its retention comes as banks await repeal of the interest rate cap; they have cut their loan disbursement to small borrowers to reduce their risks of default.

In March, the High Court declared the cap unconstitutional, giving Parliament 12 months to change the law.

Experts and international institutions have also proposed other lending systems to increase financing to the sector. They have recommended scrapping the interest rate cap. Others have proposed risk-based lending or a ceiling at a rate high enough to facilitate lending to higher-risk borrowers.

Private sectors including real estate, manufacturing and retail have been blamed for increased non-performing loans at 10.4 per cent in three months of March for the 11 listed banks, compared from 9.6 per cent in Q1 of 2018.

In the 12 months to June, the CBK report showed NPLs to gross loans of the same sectors stood at 12.7 per cent in June compared to 12.9 per cent in April.

“Banks have continued with mitigation measures against NPLs, including enhanced recovery efforts. This has been supported by the recent payments of pending bills by the government,” it said.

The Monetary Policy Committee said the sector's credit has however grown by 5.2 per cent in the last one year, compared to 4.4 per cent in May.

Strong growth in credit was observed in sectors including manufacturing (11.4 per cent); consumer durables (21.3 per cent) and private households (7.6 per cent).

“Private sector credit growth is expected to continue to strengthen in the remainder of 2019, partly due to the rollout of innovative, bank-initiated credit products targeting Micro Small and Medium Enterprises,” the MPC said.

The CBK also said it is keeping a close eye on demonetisation and the shilling, which has depreciated due to ongoing withdrawal of the older Sh1,000 notes.

Yesterday, the shilling hit a day high of Sh104.01 against the dollar before settling back to Sh103.76.

The year-on-year inflation is expected to remain within the target range of between 2.5 per cent and 7.5 per cent in the near term. This is largely due to expectations of lower food prices following improved weather conditions, and lower electricity prices due to reduced reliance on expensive power sources.

The effect of the excise tax adjustment to inflation that came into force on July 1 is expected to have a moderate impact on inflation.

“However, there is need to be vigilant of the possible effects of the recent increases in fuel prices, the ongoing demonetisation and the increased uncertainties in the external environment,” CBK Governor Patrick Njoroge said on Wednesday.

(Edited by V. Graham)