Slow Growth Anticipated On Private Sector Because of High Interest Rate – Survey

Slow Growth Anticipated On Private Sector Because Of High Interest Rate Survey- credit rating

Despite a projected surge in demand for short-term loans, high lending rates are poised to put a brake on credit growth within the private sector, according to a recent survey conducted by the Central Bank of Kenya (CBK).

In a nutshell, the growth rate of commercial bank lending to the private sector eased to 10.3% in February, down from 13.8% in January 2024.

What could be behind this shift? Well, the survey reveals that high interest rates is the major cause. Even with a rising need for short-term borrowing and working capital among both large corporations and small enterprises, the prohibitive cost of borrowing is casting a shadow over credit expansion.

The CBK Market Perceptions Survey for March 2024 sheds light on commercial banks’ outlook for the year. Survey respondents expressed anticipation of reduced credit growth in the private sector compared to 2023. This pessimism is largely attributed to the persistently high lending rates.

A staggering 62% of respondents believe that these rates, coupled with stringent credit criteria, are curbing demand and uptake of new credit facilities. Banks are adopting a cautious approach, implementing risk-based pricing strategies to mitigate Non-Performing Loans (NPLs) and escalating credit risks.

Recent CBK data shows a notable increase in the banking sector’s gross NPLs, rising by 25.7% to Sh635.8 billion in November 2023 from Sh505.9 billion in the same period of 2022. The ratio of NPLs to gross loans also ticked up, standing at 15.5% in February 2024 compared to 14.8% in December 2023.

CBK Governor Kamau Thugge, in his post-Monetary Policy Committee briefing earlier this month, highlighted the uptick in NPLs across various sectors, including real estate, trade, personal and household, energy and water, and building and construction.

Despite these challenges, commercial banks are still lending, albeit with heightened caution. They are adjusting interest rates based on borrower risk profiles, while also making provisions for potential NPLs.

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Looking ahead, 70% of respondents remain optimistic about private sector credit growth in 2024. They cite factors such as favorable weather conditions, a stable foreign exchange landscape, positive economic sentiments, and lower inflation as drivers likely to boost demand for both working capital and long-term funding.

However, concerns persist regarding the impact of high interest rates, inflationary pressures, and the overall cost of doing business in the country. These factors could continue to restrain credit appetite in the near term.

The survey, targeting key decision-makers from 354 private sector entities, including banks, microfinance institutions, and non-bank firms, sought insights into credit demand trends over recent months and future expectations.

In summary, while economic indicators paint a mixed picture, with promising growth drivers countered by persistent challenges, the path ahead for credit growth in the private sector remains nuanced and subject to ongoing market dynamics.

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