Bank lending rates reached a 32-month high in July, indicating the impact of commercial banks’ risk-based credit policy.
In July, the lending rate was 12.35 percent, the highest since November 2019 when it was 12.38 percent.
This comes as the Central Bank of Kenya (CBK) continues to approve risk-based lending across all 39 commercial banks, allowing them to consider a borrower’s creditworthiness when determining the rate to slap on their loan.
Although the policy was intended to encourage banks to lend more, it has resulted in an increase in the cost of credit for most borrowers, affecting businesses and households, who have cut spending as a result.
CBK reported in July that more than half of commercial banks had their risk-based lending plans approved or signed off on.
The increase in credit costs corresponds with a continued upward shift in the yield curve for short-term government debt securities, indicating their increased attractiveness to takers of the state’s domestic debt, such as commercial banks, pension funds, and corporations.
The 91-day Treasury Bill averaged 8.57 percent in August, up from 6.20 percent two years ago, as the government increased its borrowing from the domestic market, influencing the cost of deposits.
Because of the low risk of the investment, high returns on long-term and short-term government securities indicate a preference for lending to the state rather than the private sector.
The central bank rate was raised from 7% to 7.50% in May, and it is also expected to tighten liquidity in the market with high inflation, signaling high lending rates.
CBK, on the other hand, reported that credit growth to private sector credit increased to 12.3 percent in the year to June 2022, up from 11.5 percent in April.
Credit was most in demand in the transport and communication, manufacturing, trade, and consumer durables sectors, reflecting increased economic activity.
Banks have significantly reduced lending to individuals and small businesses based on their risk profiles since September, citing an inability to assess their creditworthiness.
President Kenyatta announced in September last year a one-year moratorium on credit reference bureaus’ negative listing of borrowers with loans under Sh5 million, reducing credit information sharing in the banking sector.
