Association
Banking (Amendment) Act
KBA
Kenya Bankers Association

Private Sector Credit Growth Suffers Under Rate Capping Law Amid Rising NPLs

The recent survey carried out by the Kenya Bankers Association (KBA) looking into the implications of the Banking (Amendment Act) 2016 indicates that private sector growth has slowed down.

The Act has not altered the decreasing rate of private sector credit with the rate caps contributing towards the declining trend.

According to KBA’s findings, private sector credit has reduced since the law was signed into effect in 2016.

However, the Association says the credit growth could have bounced back in January 2017 if the rate caps were not in effect.

The survey also showed that non-performing loans (NPLs) have risen to double-digit levels as a proportion of gross loans while sensitivity to risk has increased due to the implementation of the IFRS 9 standard.

In addition, there is limited access to credit by households and MSMEs. For instance, private household loans decreased from 25 percent at the end of 2016 to 20 percent at the end of last year.

However, loans accessed by the real estate sector increased by two percent in the same period while total loans accessed by the manufacturing sector increased by three percent. That is to say that the rate capping law has favoured big businesses at the expense of MSMEs and households.

Other findings indicate that government securities have remained attractive investment options thereby crowding-out the private sector. Moreover, the banking industry is leaning towards technology as a channel for delivering services to customers which has resulted in branch and staff rationalisation and affected local trade.

The survey also observed short-term loans are increasingly becoming desirable, noting that the law does not augur well for the economy particularly because of the relationship between credit allocation and overall economic performance.

“The market seems to be settling, but away from the intended beneficiaries of the capping law. […] The burden to the economy is increasingly becoming obvious,” the KBA findings report concludes.

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