Kenya’s manufacturing sector has been the hardest hit by the slowdown in private sector credit caused by higher commercial bank lending rates and rising non-performing loans.
Total credit to the sector declined by Sh38.8 billion to Sh597.9 billion in the three months to end-March from Sh636.7 billion in December 2023.
The decline represents almost half of the Sh82.2 billion drop in private sector credit in the first quarter of the year with the sector’s loan book falling to Sh3.829 trillion from Sh3.911 trillion.
The decline in credit to goods makers is compounding the difficulties facing the sector, which saw its slowest growth rate in 16 years at 1.3% in the first quarter, due to higher costs and new taxes.
The sector saw its slowest growth rate since the post-election violence in 2008, as market participants felt the impact of higher input costs and new tax measures such as the imposition of export and promotion taxes.
Cement companies other than Bamburi, Mombasa and Simba Cement, which make their own clinker, have incurred higher costs that have impacted product volumes, which fell to 2.1 million tonnes in the first quarter ended March from 2.3 million tonnes a year earlier.
Private sector credit has been squeezed by high interest rates and rising loan defaults, factors that have combined to push credit out of reach for some borrowers, while bad loans have prompted banks to tighten lending conditions.
Lending to the private sector was also affected by the appreciation of the Kenyan shilling, which reduced the foreign currency loan book, which covers part of the loans to manufacturing.
Private households defied the credit slowdown as the sub-sector recorded a loan book growth of Sh42 billion in the quarter.
“NPL levels are expected to remain flat in eight economic sectors, with increases in the personal and household sectors and trade and declines in the transport and communications sectors over the coming quarter. In the first quarter of 2024, credit standards remained unchanged in 10 economic sectors. Credit standards for the personal and household sectors were tightened,” the Central Bank of Kenya said in its latest credit survey.
The Central Bank pointed to the increase in defaults in the agriculture, real estate, tourism, restaurants, hotels, trade, construction and building sectors until the end of last June.
Mining and quarrying, consumer durables and business services sectors also recorded unprecedented increases, with their loan books recording the only other increases in the quarter at Sh5.3 billion, Sh0.6 billion and Sh3.7 billion respectively.
All other economic sectors witnessed a decline in credit with the commercial loan book shrinking by Sh17.8 billion, the transport and communication book falling by Sh20.6 billion, while finance, insurance and real estate loans fell by Sh24.6 billion and Sh11.6 billion respectively.
Total non-performing loans exceeded Sh641.3 billion at the end of March, compared to Sh621.3 billion in December, with the default rate subsequently reaching an 18-year high of 16.1 percent in April.
Businesses and households struggled to make payments in a high interest rate environment even as economic conditions remained weak with consumers seeing reduced disposable incomes justify lower discretionary spending.
At the same time, interest rates were raised as a result of the central bank increasing the benchmark lending rate, which rose from 9.5% in June last year to 13% at present.
The central bank expects its measures to keep credit growth weak until the second half of 2024.
“Private sector credit growth is expected to remain moderate in the near term, in line with the tight monetary policy stance,” the Central Bank of Kuwait said in its April semi-annual report on the Monetary Policy Committee.