Cost of loans falls to lowest rate since 2005

Banks have cut the cost of credit to the lowest level in 15 years following the drop in the Central Bank of Kenya benchmark lending rate and a reduction in demand for new loans. The latest development has eased fears of a rise in the cost of credit after the removal of the interest rate cap last November.

Fresh data from the Central Bank of Kenya (CBK) shows that lending rates averaged 12.19 percent in February, the lowest since January 2005 when it stood at 12.12 percent during the reign of former governor Andrew Mullei.

Kenya in November scrapped the cap on commercial lending rates, which had been blamed for stalling lending to small businesses and individuals. The removal of the legal cap led to fears of a likely to return to the era of high lending rates, which had at one point hit a high of up to 25 percent.

NCBA managing director John Gachora told the Business Daily that the lower cost of loans was in line with a fall in the central bank benchmark lending rate as well as the sluggish economic growth that has suppressed appetite for new loans.

“Banks have been clear that they were not asking for rate cap removal in order to raise rates. We said we would discipline ourselves and the data speaks to that,” said Mr Gachora.

“There is also the 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.”

CBK cut its benchmark lending rate last month for the third time in a row, arguing that the economy was operating below potential. The move was meant to cushion the economy from the impact of Coronavirus. Kenya has 208 confirmed cases of the virus and its crucial tourism and farm exports businesses have already begun to feel the impact on restrictions imposed to slow down the spread of the pandemic.

Last month, CBK cut its benchmark lending rate by 100 basis points to 7.25 percent and lowered the cash reserve ratio for commercial banks from 5.25 percent to 4.25 percent. The move to lower the cash ratio is expected to release an extra Sh35.2 billion for banks to lend to customers.

CBK had in November reduced its benchmark rate by 50 basis points from nine percent, the first such move by the regulator after holding it steady for 14 months. The committee usually meets every two months.

Mr Gachora said that the reduction in the CBR affected the pricing of the bulk of existing loans, which were offered during the rate cap regime that lasted between September 2016 and November last year.

A slowdown in business activities and the uncertain future caused by the Coronavirus pandemic globally has forced many companies and investors to put a freeze on expansion plans.

Despite this, private sector credit grew by 7.7 percent in the 12 months to February, compared to 7.1 percent in December, the central bank said. This, however, fell below the ideal rate of 12-15 percent.

Analysts say high-net worth investors and companies have opted not to invest in expanding their businesses or starting new ventures, fearing lower sales and returns arising from Coronavirus restrictions on movement of people and goods.

The National Treasury last week projected that Kenya’s economic growth could slow down to three percent or less this year from an earlier forecast of 6.1 percent as measures taken to slow down the virus sap demand from trading partners like Europe, as well as disrupting supply chains and domestic production.