Private household loans in rare drop as high interest rates bite

Outstanding banking sector loans to private households dropped by Sh13.7 billion in December last year, a rare downturn highlighting the impact of the high interest rates resulting from a series of policy rate hikes by the Central Bank of Kenya (CBK) last year.

The loans extended to private households by commercial banks, saccos, and microfinance banks, have been rising consistently for the last 14 months, but took a rare decline in December, falling 1.14 percent, data from CBK shows.

Analysts say this is a direct result of the increased cost of borrowing, coming after the CBK raised its interest rates by 200 basis points in December following a series of hikes, which saw commercial bank lending rates rise from 12.22 percent in May 2022 to at least 14.63 percent by the end of last year.

“Higher interest rates often dampen consumer sentiment, leading households to become more cautious about taking on additional debt for discretionary spending, such as home improvements or luxury purchases,” said Stellar Swakei, senior research associate at Standard Investment Bank.

Read: Private sector loan on steady six-month rise

“Typically, household borrowers are perceived to be riskier than large entities or established businesses, and based on the risk-based model, there is an additional premium that they have to pay in terms of interest, implying that the cost of borrowing becomes way higher for them.”

CBK raised the rate at which it lends to commercial banks thrice last year – by a total of 375 basis points – from 8.75 percent at the beginning of the year to 12.5 percent in December, causing the domestic lenders to also increase their lending rates.

The apex bank first raised the policy rate by 50 basis points in May 2022 after it remained constant at seven percent for over 24 months, but it appears to have not affected the private sector credit until last December.

After the first raise in May 2022, credit to private households dipped by Sh2 billion the following month but started rising again, increasing by a total of Sh55.7 billion by the end of the year.

The downturn in household credit had, however, been foreseen by commercial banks last year, as a cocktail of economic conditions, including the rising cost of credit, conspired against private sector credit growth.

According to the CBK’s Market Perceptions Survey done in November last year, the number of banks that expected private sector credit to grow had declined from 26 percent a year earlier to 11 percent.

At the same time, nine percent more banks expected private sector credit growth to dampen in December 2023 and January 2024, highlighting the expected slump as the economic situation worsened.

“Banks expect demand for credit to be dampened by reduced incomes, high-interest rates and increased cost of borrowing, the weakening of the shilling, likely to impact negatively on trade activities and cause importers to adopt a wait and see attitude,” CBK said in the survey.

However, the total loans by banks to the private sector continued to grow, posting a 13.5 percent year-on-year growth to Sh4.7 trillion. Loans to the agriculture sector posted the most growth, at 22 percent, followed by manufacturing at 20.8 percent.

Read: Three sectors got more than half of fresh loans last year

The annual growth for household credit decelerated to 7.4 percent, the slowest growth in over 12 months, highlighting the impact of the December downturn on the year’s credit overall growth.

Ms Swakei argues that while the slump could mean that the CBK has finally succeeded in using monetary policy to rein in inflation by controlling liquidity, it is a double-edged sword and could have far-reaching consequences for the economy in the long run.

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