- CBK announced 100- basis-point cuts to the base lending rate to 7.25 per cent and the Cash Reserve Ratio (CRR) to 4.25 per cent
- The reduction in the benchmark rate and extension of repo tenors aim to ensure adequate liquidity across the banking system
Moody’s has hailed Kenya’s monitory policy measures aimed at mitigating the credit-negative effect of the coronavirus outbreak on the overall economy.
‘’We expect that these measures will soften the adverse impact of the economic disruptions on banks’ asset quality and liquidity,’’ the New York-based credit rating agency said in a statement.
According to Moody’s, monetary measures like the cuts on the Central Bank Rate and Cash Reserve Ratio will ease credit flow to businesses and households and keep the banking system sufficiently liquid.
Some of the Fiscal measures announced by the government include tax relief to mitigate the impact on individuals' disposable income and corporate earnings and liquidity, supporting loan-repayment capacity and ease negative effects on banks' asset quality.
Last week, the Central Bank of Kenya (CBK) announced 100- basis-point cuts to the base lending rate to 7.25 per cent and the Cash Reserve Ratio (CRR) to 4.25 per cent, as well as an extension of the tenor on repurchase agreements (repos) up to 91 days from up to 28 days currently.
The CRR reduction is expected to release Sh35.2 billion of liquidity (one per cent of system gross loans) enabling banks to extend new lending or reschedule existing facilities to affected borrowers, a condition for banks to access these funds.
Moody’s said the reduction in the benchmark rate and extension of repo tenors aim to ensure adequate liquidity across the banking system, easing any liquidity stress.
Lower lending rates will also provide a small cash flow relief to borrowers, but will also weigh on banks' net interest margins, the main contributor to banks' profitability.
‘’To avoid this, CBK encouraged banks to lower their deposit rates, which averaged at 6.6 per cent (against a 12.4 per cent average lending rate) as of November 2019,’’ Moody’s said.
It added that the government’s decision to pay a sizable amount in pending bills and VAT refunds will mitigate the hit on individuals' disposable income and corporate earnings as well as fostering liquidity, supporting loan repayment capacity and mitigating any negative effects on banks' asset quality.
Despite the various support and liquidity measures to be implemented, the rating firm expects small and midsize enterprises (SMEs) to bear the brunt of the economic disruption with SME aligned banks like Equity Group likely to face the greatest challenge because 59 per cent of its loan book was exposed to SME lending as of the end of December 2019.
However, Equity Bank has stronger profitability buffers and higher liquid assets than its rated domestic peers, which will help mitigate asset-quality pressure.
The rating firm maintained credit ratings for three biggest banks in Kenya: KCB Group, Equity Group and Coop Bank at B2 Stable.