High lending charges hit demand for credit
14 August 2015, 12:02
Nairobi - Demand for credit in the country has stagnated in many sectors as borrowing charges soar, a new survey shows.
The survey by the Central Bank of Kenya, which interviewed credit officers in the country's 43 financial institutions, shows that high interest rates made many potential borrowers to keep off banks in the second quarter of this year.
"Demand for credit remained constant in seven economic sectors, namely, mining, energy, financial services, manufacturing, transport, agriculture and tourism," said the survey.
Only four economic sectors recorded marginal increases in demand for credit, and these were trade, building, personal/household and real estate.
Kenya's commercial banks' interest rates currently stand at an average of 17 percent, according to the Kenya National Bureau of Statistics (KNBS). The interest rates have been on upward trajectory following the raising of the Central Bank's indicative rate by 3 percent in the past three months in bid to mop up excess liquidity in the market to save the shilling from weakening against world currencies.
Some banks have consequently pushed up their lending charges to reflect the new change. The high cost of borrowing, according to the survey, affected demand for credit by 26 percent.
"The banks indicated that the cost of borrowing and the recent upward review of Central Bank Rate had the most impact in reducing the demand for credit," said the survey.
Read Also: CBK holds rates against market expectations
The banks also saw their pre-tax profits rise to 761 billion dollars from 703 billion dollars from June 2014, translating to an increase of 8.3 percent.
Most banks, or 41 percent, in the nation expect the levels of non-performing loans (NPLs) to remain constant in many economic sectors in the third quarter. However, banks foresee increase in NPLs in the tourism sector.
"Most respondents quoted spillover of delinquencies attributed to the previous spate of insecurity and adverse travel advisories as factors that will lead to increased NPLs in tourism sector," said the survey.
On the contrary, some respondents, or 39 percent, were optimistic that in the coming months, tourism is expected to recover after the lifting of adverse travel advisories by U.S. and Britain.
"This expectation is also supported by the fact that we are currently in the high season for tourism sector in Kenya which runs from July to December,"it said.
The banks, thus, intend to intensify credit recovery efforts in the third quarter, to mitigate the likely increase in NPLs due to rise in interest rates and to improve their overall quality of asset portfolio.
For the latest on national news, politics, sport, entertainment and more follow us on Twitter and like our Facebook page!