Only the banking sector recorded faster growth in the first quarter of 2024, reflecting the huge profits that lenders made from the high interest rates they charged and increased borrowing by cash-strapped companies.
Data from the Kenya National Bureau of Statistics shows that all other economic sectors recorded slower growth in the first three months of 2024 compared to the same period last year, indicating a difficult operating environment characterised by increased defaults due to the high cost of money.
The financial and insurance sector grew by 7.0 percent in the first quarter of 2024 compared to about 5.9 percent in the corresponding quarter of 2023, as commercial banks benefited from the expensive credit they imposed on borrowers, including the government.
Kenya’s central bank figures show the interest rate differential – or the difference between what banks pay depositors and what they charge borrowers – widened to a 31-month high of 5.76% by the end of March this year.
Stellar Sawaki, senior research associate at Standard Investment Bank (SIB), noted that growth in the banking sector was supported by loan earnings.
“Following the tax amendments under the Finance Act 2023, the cost of doing business in Kenya has increased and the banking sector has responded with a remarkable 7.5 per cent average growth in net loans and advances to customers in (Q1 2024),” she said.
“Interest income also rose by a staggering 22.8 percent, likely due to higher lending rates after the central bank raised interest rates,” the IIB official added.
KCB Group, which posted a 69% profit growth to overtake Equity Group as the most profitable bank, also registered decent growth in its loan book.
The lender’s first-quarter earnings growth came on the back of interest income, derived mainly from lending, which grew 40.8 percent to Sh31.06. The equity group increased net interest income to Sh27.8 billion from Sh21.6 billion.
After the central bank raised its benchmark lending rate to help ease inflation in the economy, banks responded by raising their lending costs as well, a move that has also been blamed for the rise in defaults.
The central bank raised the policy rate, which indicates the cost of borrowing, to 13 percent in March 2024 from 9.50 percent in March 2023. Central bank data shows banks’ profitability rose 12.9 percent in the review period to Sh73.5 billion from Sh65.1 billion in the same period last year.