Kenya’s central bank lowers policy rate, but there are no clear winners

Central Bank of Kenya Governor Patrick Njoroge. PHOTO | NMG 

In Summary

• Commercial banks have since shunned lending to individuals and SMEs which they perceive to be much riskier after the rate caps since their credit risk can no longer be factored in the new pricing regime for loans.
• Analysts at AIB Capital said the overall banking sector loan book growth would remain weak for the time being as banks commit cash to government securities while anticipating a review of the controlled interest rate regime.
• Both public and private sector are in dire need of credit, but government’s appetite makes this a no-contest.

By JAMES ANYANZWA
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Kenya’s Central Bank lowered its policy lending rate by 50 basis points for the first time in 18 months, forcing banks to reprice loans for existing borrowers from 14 per cent to 13.5 per cent.

The bank’s Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) to 9.5 per cent from 10 per cent after holding it steady since September 2016.

The last time CBK reduced the CBR by 50 basis points was on September 20, 2016 after the interest rate capping law came into force on September 14, 2016, fixing lending rates at four percentage points above the prevailing CBR.

But the question is whether the reduction in CBR will translate to increased lending to the private sector.

Elephant in the room

Last week, CBK Governor Patrick Njoroge said the bank’s latest monetary policy decision was informed by the need to stimulate the economy whose output was wobbling below its potential due to declining credit to businesses and households.

While CBK’s intentions are noble, it is argued that the market dynamics under the controlled interest rate regime points to a situation where the lowering of the CBR may not automatically lead to increased credit to the private sector.

The Central Bank of Kenya (CBK) has announced the tap sale will close on Thursday next week. FILE PHOTO | NMG 

“I think it is the intention of MPC to pass a signal to the market that it requires lower rates to spur credit in terms of lending, but the challenge is whether the market will respond  in the direction the signal is giving because the elephant in the room is the rate cap, which complicates the response,” said Habil Olaka, chief executive of Kenya Bankers Association.

“As long as the appetite of the government to borrow from the domestic market is there, they will be competing with the private sector in terms of accessing funds. If lending to the government seems to make much sense, then the market will direct liquidity to Treasury bills as opposed to lending to riskier segments where you cannot get commensurate returns,” Mr Olaka added.

Commercial banks have since shunned lending to individuals and SMEs which they perceive to be much riskier after the rate caps since their credit risk can no longer be factored in the new pricing regime for loans.

According to CBK rationing out Micro, Small and Medium Enterprises (MSMEs) from the credit market is estimated to have lowered last year’s economic growth by 0.4 percentage points.

Lenders have directed their lending in favour of large corporate borrowers and Government thereby shunning small and risky borrowers.

“The net effect of this reduction in CBR is that the government will access much cheaper funds domestically. Because of the rate cap we have seen private lending slow down and we could see it even slower with a lower CBR,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers.

“Banks have instituted a much more conservative stance and instead diverted funds towards government securities So we quite possibly see an increase on this front. Excess liquidity chasing limited opportunities.”

Analysts at AIB Capital said the overall banking sector loan book growth would remain weak for the time being as banks commit cash to government securities while anticipating a review of the controlled interest rate regime.

“We expect the overall sector loan book growth to remain weak at least in the near term. Banks are expected to hold on to liquidity as they wait for the environment to improve. Banks hold back from lending due to a deteriorating business environment. The environment deteriorates further because banks have held back lending,” according to AIB Capital.

By June 2017, Kenyan banks had invested a total of Ksh955 billion ($9.55 billion) in government securities compared with Ksh798 billion ($7.98 billion) in the same period the previous year (2016), representing a 19.7 per cent growth while interest income on loans and advances declined 13 per cent to Ksh174 billion ($1.74 billion) from Ksh200 billion ($2 billion) in the same period.

Big loan focus

Kenyan government is in dire need of funds to finance its infrastructure projects and fund government operations.

The country’s public debt stood at Ksh4.57 trillion ($45.7 billion) in December 2017 reflecting the Jubilee government’s increasing appetite for loans.

This figure does not include the $2 billion that was raised last month through Kenya’s second Eurobond issue.

Kenyan banks currently control more than 55 per cent of the government debt and last year up to 18 banks transferred funds from private sector credit to Government securities.

According to CBK the capping of interest rates has infringed on the independence of the central bank and complicated the conduct of monetary policy.

“Banks have shifted lending to Government and the large corporates. Whereas demand for credit immediately increased following the capping of lending rates, credit to the private sector has continued to decline,” according to the CBK.

The number of loan accounts has declined as banks focus on issuing big loans to only established firms.

The CBK adds that it is small and medium enterprises that have borne the greatest impact of the interest rate capping law.