Banks shore up lending in post-interest rates caps era

Banks have this year increased lending since interest rates caps were introduced in September 2016, data from Central Bank of Kenya (CBK) indicates.

Between January and May, statistics indicate bank loan portfolio expanded by 3.7 per cent from Sh2.39 trillion to Sh2.48 trillion last year mainly due to a major increase in demand for loans in the personal or household, manufacturing, trade and real estate segments.

However, while some analysts see the growth trend as a positive move in the right direction, critics say a large portion of the credit goes to households – at Sh64 billion or 62 per cent – for consumption rather production or investment.

Agriculture, which accounts for 65 per cent of the country’s export earnings, provides livelihood (employment, income and food security needs) for more than 80 per cent of the population only received Sh2.3 billion.

Low lending

Benson Mapesa, a senior economist at the National Treasury attributes the low lending to the agriculture sector to its unreliability and lack of structures in the market.

“Most banks tend to shy away from lending to the agricultural sector arguing that it is not reliable. Most farmers depend on rainfall and when it fails, crops also fail, which means farmers may not be able to repay their loans,” he said.

Kenya Business Guide Project Leader, Sahil Shal, also said agriculture is risky because of a lot of uncertainties.

“When banks have funds they cannot lend, it is incumbent upon them to ensure they look for a way that is not only less risky but also gives them good returns,” Shal said.

During the period under review, lending to the trade sector stood at Sh31 billion, manufacturing (Sh21 billion), transport and communication (Sh10 billion) and financial services and insurance (Sh5.9 billion).

Shal said while dealing with excess liquidity (money) in the market forces banks to go into mobile lending because of higher returns than T-Bills which currently have an average interest of 6.3 per cent.

A senior economist in one of the commercial banks, who did not wish to be named, said though lending to the private sector, is rising phenomenally, there is a need to direct such funds to critical sectors of the country to grow and create jobs.

Households lending 

“When critical sectors such as agriculture, manufacturing, transport and communication receive low funding as opposed to households, then if the economy grows, it will be a slow pace,” he said.

The economist said bulk of households lending is in the form of salaries advancement and purchases of property which have no real impact on economic development.

He said banks are now concentrating on providing short-term loans not funding projects with longer tenure.

“They have reduced our funding in the real estates because the sector is oversupplied and the demand is very slow,” he said.

Job creation

On manufacturing, Mapesa said the sector, which promises to be a major source of job creation for the youth, has also not been growing as expected mainly due to cheap Chinese products.

He said a decade ago, Kenya used to export manufactured products to most countries in the region, this is no longer the case today.

“These countries have reduced their imports from Kenya because they have also developed industries to manufacture to create employment for their growing population,” he said.

Uganda and Rwanda have established industries that manufacture some products produced in Kenya while Tanzania continues to use non-tariff barriers, to enforce its inward-looking policy.