CREDIT

Private sector starved as banks opt to lend to government

In Summary
  • Early this week, CBK issued a Sh70 billion infrastructure bond.
  • private sector credit growth fell from its peak of about 25 per cent in mid-2014 to a record low of 1.9 percent in January 2018 on rate cap effects.
A carpenter cuts a piece of frame during the construction of the dias used during the swearing in ceremony of President elect Uhuru Kenyatta at Kasarani Stadium.
A carpenter cuts a piece of frame during the construction of the dias used during the swearing in ceremony of President elect Uhuru Kenyatta at Kasarani Stadium.
Image: CHARLES KIMANI

*John, a carpenter in Gachie is a worried man after failing to secure a loan from his bank to top up his business.

He says, many of his customers who normally take furniture on credit after depositing half of the agreed amount have failed him, citing financial constraints brought about by effects of coronavirus that hit the country mid-March.

‘’I have a good credit history. Never have I defaulted on a loan. My credit officer at the bank keeps taking me in circles. This is the fourth week, no loan in sight,’’ he said.

 
 

John is just a representation of many traders currently being given a wide berth by local lenders afraid of high-risk segments even as non-performing loans rise. Lenders are opting for secure low yield government securities.

According to Q1 banking statistics by the Central Bank of Kenya (CBK), banks’ asset quality deteriorated, with the gross NPL ratio increasing by 90 basis points to 11.3 per cent from 10.4 per cent corresponding quarter last year.

This was high compared to the five-year average of 8.5 per cent.

 In accordance with IFRS 9, banks are expected to provide both for the incurred and expected credit losses.

Consequently, this saw the NPL coverage increase to 57.4 per cent from 54.5 per cent same quarter last year in as lenders adopted a cautious stance on the back of the expected impact of the COVID-19 pandemic.

‘’We expect higher provisional requirements to subdue profitability during the year across the banking sector on account of the tough business environment,’’ Cytonn said in its Q1 analysis of the banking sector.

A financial risk analyst Dan Mukara told the Star that the country is likely to experience low private-sector lending, worse than the one experienced during the interest cap regime as lenders opt for secure options.

 
 

CBK data shows private sector credit growth fell from its peak of about 25 per cent in mid-2014 to a record low of 1.9 percent in January 2018 on rate cap effects.

Kenya's Domestic Credit increased by 11.7 per cent in May, compared with an increase of 9.5 per cent in the previous month.

He explained that the true effects of Covid-19 on the banking sector will be reflected in the soon to be announced half-year results.

‘’Banks are likely to adopt even tighter lending mechanisms to limit risks. This is going to hit hard the private sector and the general economy by larger extend,’’ Mukara said.

He added that banks are likely to continue running to government securities despite low yields at the expense of the private sector, the engine of the country’s economy.

According to Economic Survey 2020 by the Kenya National Bureau of Statistics (KNBS), small businesses account for 64 per cent of the country’s Gross Domestic Product with the general private sector accounting for above 80 per cent.

This is going to pile pressure on the economy, which is expected to have a negative growth this year as projected by thE International Monetary Fund (IMF)

Even so, weekly bulletins by CBK indicate a growing demand for government securities.

For instance, the Treasury bills auction of July 23 received bids totaling Sh35.9 billion against an advertised amount of Sh24. billion, representing a performance of 149.6 percent.

The reopened 5-year, 10-year and 15-year Treasury bonds offered at the auction of July 22 received bids worth Sh181.8 billion against an advertised amount of Sh60 billion, representing a performance of 303.0 per cent.

Early this week, CBK issued a Sh70 billion infrastructure bond.

This despite a general drop in yield s, both for T-bills and bonds.

Globally, at least $96 billion (Sh10.5 trillion) of government bonds were put on offer within 40 days into the Covid-19 crisis, according to the International Finance Corporation.