The pressure on the interest rates is projected to ease in the second half of the year with expected disbursement from international lenders.
Last week, Central Bank of Kenya governor Kamau Thugge told the Senate Committee on Finance that the government's increased borrowing from the local market in the first half of the year has led to increased interest.
The National Treasury has been floating budgetary support bonds averaging Sh40 billion per month, competing with the private sector for credit, pushing up the cost of borrowing.
Credit to the private sector, however, continues to rise despite the pressure amounted by government borrowing.
The latest data by CBK shows growth in private sector credit remained relatively stable at 12.5 per cent in October and 12.2 per cent in September.
Strong credit growth was observed in manufacturing (18.4 per cent), transport and communication (16.2 percent), trade (9.9 percent), and consumer durables (10.8 percent).
The number of loan applications and approvals remained strong, reflecting sustained demand, particularly for working capital requirements
"The government's increased borrowing from the local market in the first half of the year has led to increased interest,'' Thugge said.
Thugge said that Kenya is set to receive additional financing of $938 million (Sh143.4 billion) through the 48-month Extended Fund Facility (EFF) and Extended Credit Facility (ECF) programme from IMF.
“In January we expect 682 million dollars to come from the IMF, we also have some funds from the trade debt bank in the next two weeks, and we also have funding from AfroExim and World Bank.''
"We expect to reduce domestic borrowing, this should lower interest rates. Once this is done, we will see stability in the exchange rate because of external financing,” Thugge told the Ali Roba-led committee.
He reiterated that the apex bank is confident of an improved environment mid-next year.
Last week, the regulator raised the base lending rate by 200 basis points to 12.5 per cent a high in recent times, signling even further high interest rates.
Already, several banks have effected a two per cent increase in interest rates, with customers with good credit history borrowing at an average of 16 per cent while worst loan repayers pay an extra 10 per cent for their risks.
Experts worry that high rates are likely to accelerate the rate of loan default in the country which has already hit a 16-year high.
According to the apex bank, at least 596 billion of the banking sector book was in default by August. It is projected that total Non-Performing Loans (NPLs) will cloak Sh1 trillion.
Apart from high borrowing rates, the Senate Committee on Finance put Thugge to account for the shilling that is fast depreciating against major international currencies.
The governor said that with the performance of the Kenya shilling against other currencies still under scrutiny, steps are being taken by the government to prevent it from dwindling further.
On Friday, the shilling closed the market at 153.32 units having dropped from 153.15 the previous week.
While raising the base lending rate, CBK said the increase will ensure that inflationary expectations remain anchored, while setting inflation on a firm downward path towards the five per cent mid-point of the target range.
It said the low performance of the shilling has contributed three per cent to the inflation figure.
"The MPC therefore concluded that there is a need to adjust the monetary policy stance to address the pressures on the exchange rate and mitigate second-round effects including from global prices,'' CBK said.
