Tight liquidity slows growth of private sector credit in 2015

October 19, 2015
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The report stipulates that private household, trade and real estate accounted for 60 percent of the total volumes of loans, with the share of loans to productive sectors low, except for manufacturing.
The report stipulates that private household, trade and real estate accounted for 60 percent of the total volumes of loans, with the share of loans to productive sectors low, except for manufacturing.

, NAIROBI, Kenya Oct 19 – Kenya’s credit to the private sector fell from 25.8 percent in March 2014 to 20.5 percent in June 2015 and could be going on a downward trend according to a report from the World Bank.

This was affected by tight liquidity in the country with liquidity ratios at 39.9 percent in the first quarter of 2015, up from 37.7 percent in December 2014 bearing in mind the minimum statutory limit is at 20 percent.

Private credit increased in only three sectors that include agriculture, manufacturing as well as building and construction.

According to the report private sector credit to agriculture grew from 7.7 percent to 22.3 percent, manufacturing grew from 17.3 percent to 21.1 percent while building and construction grew from 2 percent to 12.7 percent.

“The continuing infrastructure spending on the Standard Gauge Railway is having a catalytic effect on related sectors of the economy, including building and construction, heavy manufacturing, engineering services and many more. Thanks to adequate rains in 2015, the agriculture sector expects a bumper harvest, which should increase consumption,” the report indicates.

Credit to business services dropped from 45.5 percent to 27.8 percent while real estate declined from 28.4 percent to 19.6 percent.

Also on the downward trend was trade that fell from 25.2 percent to 18.8 percent as consumer goods decreased from 22.5 percent to 12.4 percent in 2015.

The report stipulates that private household, trade and real estate accounted for 60 percent of the total volumes of loans, with the share of loans to productive sectors low, except for manufacturing.

According to the report the share of nonperforming loans to total loans increased from 4.3 percent in December 2014 to 5.6 percent in June 2015.

“Ten of 11 economic sectors registered increases in non-performing loans, as the economy missed its high-growth target, the share of nonperforming loans increased 27.6 percent in building and construction and 20.5 percent in real estate in the first quarter of 2015,” the report states.

Credit to the private sector is also expected to deteriorate as interest rates have climbed with the Central Bank Rate going up 300 basis points to 11.50 percent up from 8.5 percent.

Central Bank of Kenya (CBK) has also raised the Kenya Bankers Reference Rate (KBRR) to 9.87 percent from 8.5 percent effective 7th July 2015.

If inflation rises, the CBK could decide to raise CBR again to calm the market, but as the report warns, a steep rise in interest rates would dampen aggregate demand, as both consumption and investment spending will slow down and reduce growth.

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