The Central Bank of Kenya (CBK) will control lending to businesses and homes from its Sh41.3 billion cash reserves to ensure the loans are only offered to borrowers affected by the impact of the coronavirus pandemic.
CBK has told banks they will have to submit a list including borrowers’ names, economic sector, amounts and the reasons for borrowing ahead of accessing additional reserves generated from reduced cash holdings requirements for banks.
The banking regulator on March 23 reduced the cash reserve ratio for commercial banks to 4.25 percent of their total deposits from 5.25 percent, saying the move would release an extra Sh35.2 billion for lending to customers hit by the disease.
The extra cash reserves have since increased to a new high of Sh41.3 billion and CBK reckons it will approve businesses and individuals that can access the billions.
This is meant to guard against the banks using the extra billions to lend to profitable firms and to government through purchase of Treasury Bills and bonds.
“In order to access the additional liquidity occasioned by the reduction of CRR (cash reserve ratio) banks, mortgage and microfinance banks will be required to submit their requests…with necessary supporting documents detailing how the borrowing funded by the reduced amount of CRR is related to Covid-19,” CBK said in a circular seen by the Business Daily.
This presents a rare occasion when banks will have to seek CBK approval on whom to lend to, which comes months after Kenya dropped legal control of lending rates.
Kenya Bankers Association (KBA)—bankers’ lobby- said they will be forwarding loan application forms to the CBK.
This is the first time since 2008 at the peak of the global financial crisis and the deepest world recession for a generation that CBK is cutting the cash reserve ratio.
The extra billions will provide banks with low-cost funds for cheap loans and lending to households and homes expected to suffer reduced cash flow due to the virus.
Kenya has reported 225 confirmed coronavirus cases and 10 deaths.
Its crucial tourism and farm exports businesses have already been hit by the impact of the outbreak.
The government has responded by rolling out tough travel, mass gathering and isolation rules to curb the spread of coronavirus.
The impact of social distancing and restriction of businesses like schools, bars and restaurants looks set to impact on consumer spending, setting the stage for job cuts and unpaid leave for workers struggling with reduced cash flow.
Companies will also be hit by reduced demand for their products, forcing some to rely on bank credit to remain afloat.
CBK also cut its benchmark rate by the largest margin in three and a half years from 8.25 percent to 7.25 percent to boost the flow of cheap loans in an economy plagued by the coronavirus outbreak.
Treasury last week said Kenya’s economic growth will slow down to 3 percent or less this year from an earlier forecast of 6.1 percent due to the effects of the virus.
Banks have cut the price of loans to the lowest level in 15 years following the drop in the central bank benchmark lending rate and reduced demand for new borrowing.
Lending rates averaged 12.19 percent in February, the lowest since January 2005 when it was at 12.12 percent.
“There is also a question of demand in the sense that we haven’t seen a huge growth in new lending and so the old lending which was pegged on CBR continues with the original pricing, meaning a cut in CBR (Central Bank Rate) also reduces overall pricing,” NCBA managing director John Gachora said
Credit to the private sector, the CBK said, grew by 7.7 percent in the year to February, compared to 7.1 percent in the year to December, which are both below the ideal growth level of between 12 and 15 percent to support economic growth.
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