The International Monetary Fund (IMF) sees private sector lending recovering next year, as the Central Bank of Kenya (CBK) begins nudging domestic interest rates lower on improved macroeconomic conditions.
The multilateral lender nevertheless expects private sector lending to close at a lowly 3.3 percent this year before recovering to grow by 12.4 percent in 2025.
Private sector credit growth has collapsed due to high interest rates and loan defaults, registering a meagre improvement of 1.3 percent in August this year.
The marginal growth in private sector credit in August, compares to the era of interest rate caps on commercial bank lending between June 2016 and November 2019 when lenders held back against issuing loans at rates fixed to the benchmark rate.
CBK cut its benchmark lending rate last month from 12.75 percent to a flat 12 percent, in a move aimed at restoring the demand for credit in the economy.
The apex bank had previously raised the benchmark as a remedy to runaway inflation and foreign exchange volatility, moving the rate to a high of 13 percent in February this year.
IMF has highlighted CBK’s action to affirm price stability as positive even as it seeks to see new remedies to high loan impairment, with the ratio of non-performing loans (NPLs) remaining at an 18-year high of 16.7 percent as of August.
“The CBK’s decisive actions have supported price stability and external sustainability, including through institutional changes to improve the functioning of the monetary policy operational framework and the money and foreign exchange markets,” noted IMF’s first Deputy Managing Director Gita Gopinath.
“Exchange rate flexibility is vital to improve resilience to external shocks and competitiveness. Addressing banks’ deteriorating asset quality and emerging risks requires close monitoring and strengthened oversight.”
CBK expects banks to follow its indicative policy stance and cut interest rate on commercial loans, to relieve customers choked by sharp borrowing costs.
CBK Governor Kamau Thugge said he summoned bank chief executives last month to address concerns that lending rates had failed to respond to cuts in the benchmark rate.
The pressure to cut commercial bank lending rates is in the wake of lobbying by President William Ruto and Treasury Cabinet Secretary John Mbadi, who see cheaper credit anchoring the rebound of economic output.
“We have agreed with the commercial banks that we will have a meeting to brainstorm to ensure with the low inflation and CBR, that the banks extend lower interest rates to borrowers. With inflation declining steadily and CBK easing monetary policy, there is absolutely no reason not to have lower interest rates by the commercial banks,” Dr Thugge said on October 15.