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Companies are banking on low borrowing costs to build a cushion of cash and patch up holes left in their revenue base by pandemic shocks.

Financial sector earning reports show double digit growth in the loan books of banks due to companies moving to lock in lower borrowing costs and banks adding defaulted interest payments on principal.

Reports indicate commercial banks added nearly Sh400 billion to their loan books in the six months to June with big banks like KCB’s net loans and advances growing by Sh95 billion in the same period to stand at Sh559.9 billion.

Equity Bank’s loan book grew by Sh108 billion to Sh746.5 billion in the period under review while Stanbic bank saw its loan book rise by Sh44 billion during the period as Absa bank added Sh16 billion to her loan book.

“The growth in the loan books of banks is not an indication of increased economic activities,” says Economist Robert Shaw.

“With the rate setting now set aside, companies know that banks are at liberty to raise interest rates.

They are taking advantage of low rates to negotiate with banks for help with the day-to-day operations due to disruption of their revenues,” said Shaw.

Central Bank of Kenya (CBK) data shows that credit to the private sector grew faster in the period between January and April compared to the previous months with most of the money going to manufacturing, trade and transport.

Credit to manufacturing sector grew by a record 20 per cent in April and seemed to grow with the trend of rising coronavirus infections. 

Overall credit to the private sector was also up 9 per cent in April, the highest in the previous 13 months.

Household credit, however, contracted sharply in that period to grow at 2 per cent, the lowest in the 13 months even as real estate lending also slowed.

Analysts, however, also said that part of the growth in loan books could also arise from interest capitalisation, which is the addition of unpaid interest to the principal of your loan.

“This is happening amidst a dislocation between growth in loans and loanbook revenues,” said George Bodo, a banking sector analyst and head of the financial desk at Ecobank Capital.

Non-performing loans

This could also be supported by the surge in non-performing loans across the industry. High debt breeds fragility, as companies cut costs and corners to meet their elevated financial liabilities.

“Banks are very sensitive to the fact that the auctioneers have enough properties that have no takers, so they are being forced to discuss defaults with customers instead of resorting to auctions,” Shaw said.

Heavy debt breeds fragility, making companies to cut costs and corners in order to meet their elevated financial liabilities.

It makes them vulnerable to external shocks, and thus more likely to take refuge in socially negative responses such as running down investment, shutting down plants and firing staff.

Central Bank cut the base rate to a record seven per cent forcing banks to cut loan prices even as bank CEOs protested the 4 per cent pricing margin.

Commercial bank loans are now going for an average of 11.94 per cent. The 91-day Treasury bill is now priced at 6.2 per cent.

The death of the corporate bond market has left companies with limited choice except for commercial bank loans.

For instance distressed companies like Kenya Airways have seen their longterm debt rise to Sh159 billion in the six month to June up from Sh145 billion as of December last year forcing the government to place a debt moratorium on the firm.

A poorly developed corporate bond markets have left companies with little choice but to opt for the relatively expensive commercial bank loans which are also very volatile.

Lack of government support to companies in Kenya has left midsized to big firms with no lifeline other than to fall back to commercial banks.