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Soaring lending rates hit demand for credit in Kenya

Xinhua, November 11, 2015 Adjust font size:

High cost of borrowing in Kenya has hit demand for credit, making it go flat in key sectors of the economy, new survey by the Central Bank of Kenya (CBK) showed Wednesday.

Demand for credit in the East African nation, according to the survey done in 41 commercial banks, generally remained constant in seven economic sectors during the quarter ended September.

"The seven economic sectors that recorded unchanged demand for credit were agriculture, mining and quarrying, energy and water, tourism, transport and financial services. Only four experienced slight rise in demand for credit and these are building, trade, real estate and personal/household," said the CBK.

Commercial banks interest rates in the East African nation currently stand at between 19 percent and 30 percent, from a low of 15 percent.

The financial institutions have increased their lending rates in response to the Central Bank's move to raise its benchmark rate to 11.5 percent from 8.5 percent in bid to tame the weakening shilling.

CBK's move led to surge in Treasury bills and bonds interest rates to a high of 23 percent as banks scrambled to lend the government effectively making loans expensive.

Other factors that affected demand for credit during the sector, according to the apex bank, are security risks, increased Central Bank Rate and Kenya Banks Reference Rate.

The low demand for credit made the industry's gross loans and advances rise slightly during the quarter from 22.3 billion U.S. dollars in June to 22.7 billion dollars in September.

Equally, Non-Performing Loans (NPL) increased significantly in eight out of 11 economic sectors.

"The sectors which experienced the highest increase in NPLs in the quarter were financial services and energy and water, which saw bad loans rise by 11.5 percent and 11.6 percent respectively," said CBK.

The sector with the highest decrease in NPLs in the same period was tourism, restaurant and hotels, which recorded a decrease of 14 percent, pointing to better times in the industry that was hit hard by terrorism.

The surge in NPLs pushed up bad loans by 0.7 percent from about 1.21 billion dollars in June to 1.22 billion dollars in September.

"The quality of assets, measured as a proportion of net NPLs to gross loans slightly decreased from 2.7 percent in June to 2.5 percent in September. The ratio of gross NPLs to gross loans also decreased slightly from 5.7 percent in June 2015 to 5.4 percent," said CBK.

According to the regulator, banks intensified credit recovery efforts in the last quarter to mitigate the likely increase in NPLs due to rise in interest rates and to improve the overall quality of asset portfolio.

"For sectors such as tourism and agriculture, which experience seasonal fluctuations of cash flows, banks intend to, intensify recovery efforts to collect amounts due during the Christmas boom season."

During the quarter in review, the banking sector recorded 366 million dollars in pre-tax profit, which was a decrease of 5.8 percent from 8 million dollars registered in the quarter ending June.

Generally, the CBK expects the Kenyan banking sector to remain stable and maintain an upward growth trend in the remainder of 2015. Endit