The declining growth in credit to the private sector is likely to hurt the projected six per cent growth in the economy next year, investment firm Cytonn has warned yesterday.
The firm joins the National Treasury which has expressed concerns over slower growth next year for the same reasons.
"We have moderated our growth (forecast) in 2017 to slightly over six per cent. Before we were very optimistic it would get to 6.5 per cent," the director general of fiscal and economic affairs at the Treasury Geoffrey Mwau told Reuters on November 23. "We don't see credit growth affecting growth especially for 2016."
Cytonn said yesterday that banks have become “choosy” on who to give credit under the Banking (Amendment) Act, 2016 which caps lending rates at four per cent above the Central Bank Rate, currently at 10 per cent.
“Private sector credit growth in Kenya slowed for the 15th consecutive month in October with the International Monetary Fund warning that this will probably act as a drag on the country’s economic expansion next year,” Cytonn investment manager Maurice Oduor said in Nairobi.
The enforcement of the interest capping law on September 14 saw lenders rush to invest in government securities which are risk-free.
“We do not expect the private sector credit growth to pick up as the loan pricing framework brought about by the Banking Amendment Act 2016 is rigid and does not accommodate borrowers who cannot fit within the four per cent,” Cytonn said in its banking industry report for the third quarter.
The Monetary Policy Committee, the top decision-making organ of the Central Bank, retained the CBR at 10 per cent on November 28.
Credit to the private sector grew 4.6 per cent in October, Cytonn said, the slowest pace since June 2008, the year that the economy grew just 0.2 per cent.
The significant decline in private sector credit growth has also been attributed to rising rate of bad loans to businesses and household loans.
Latest CBK's Credit Officer report shows that the industry’s non-performing loans increased by 12.6 per cent year-on-year to Sh190.7 billion in June from Sh169.4 billion.
Some banks have resorted to job cuts to manage costs in the wake of reduced interest margins. Cytonn warned of more retrenchment in the near-term, with likelihood of mergers as lenders seek to continue remaining profitable.
“Two things that will shape mergers and acquisition: one, the entry of foreign banks through acquisition and number two will be local banks operating in this banking space but have common shareholders,” Oduor said.
The investment firm also also raised concerns over the country's public debt which has hit a new record Sh3.566 trillion.
“Unless we increase our tax revenues, it is a big issue,” chief investment officer Elizabeth Nkukuu said.