Banks are set to cut lending to government suppliers due to high defaults attributed to late payments by national and county governments.
This is a blow to young enterprises that have been depending on public tenders for business. It is also likely to lead to job cuts, hurting social economic wellbeing of thousands of people in such businesses.
On Friday, the much awaited govwent live, posting 1,206 tenders, 622 registered suppliers and 156 contracts worth Sh14.95 billion.
In a CBK market perceptions survey to gauge banks’ expectations on their growth, banks have cited risks on delays by county and central government to settle pending bills of suppliers, in their efforts to stimulate credit growth.
According to CBK, banks shunned lending to risky private sector during the period under review, opting for government securities in light of interest rate cap.
Last week, Equity Bank raised concerns on high non-performing loans in the country, linking the trend to late government payment to suppliers.
Speaking while releasing the bank’s half year results for the period to June 30, chief executive James Mwangi said high loan default rate by small businesses coupled by interest capping has forced the bank to gravitate towards government securities, crowding out private sector.
“We understand that small businesses are struggling to meet their credit obligations due to late payments by both counties and national government. The country’s non-performing loan rate is at 12.1 per cent. This is way too high,’’ Mwangi said.
Credit to private sector however grew from 2.4 per cent to 4.3 per cent on the back of an improved economy due to political calmness.
Banks are now looking to recover from slow growth made in the March, May and July 2018 surveys that were attributed to delayed payment of contractors by the central and county governments. This led to reluctance to lend due to exposure to non-performing loans.
“Banks expects increase in credit growth to private sector tied to economic growth and possible review of interest capping law,’’ CBK said.
Three banks indicated they expect to reduce their lending in 2018 citing no room for absorbing provisions on lending with the reduced margins under the interest rate capping regime, and reluctance to lend due to exposure to higher non-performing loans.
Lenders are concerned that the positive economic sentiments will be watered down by impacts of tax measures in the proposed Finance Bill 2018. The survey is conducted every two months, prior to the Monetary Policy Committee meeting, to gauge the expectations of commercial banks, including microfinance, and non-bank private sector firms on selected economic indicators.
The non-bank private firms were sampled from Nairobi, Mombasa, Kisumu, Eldoret, Nakuru, Nyeri and Meru, sectors that account for about 70 percent of Kenya’s GDP.