The Central Bank of Kenya (CBK) has stepped in to spur the uptake of new loans and stem the tide of increasing non-performing loans in the economy with a 75 basis point cut in its key lending rate. This move will see borrowers experience relief in the cost of loans as lenders start pricing their loans from CBK's 12 percent, down from an earlier 12.75 percent.

While announcing the ease in key lending rate, CBK Governor and head of the Monetary Policy Committee (MPC) Dr. Kamau Thugge cited slower credit uptake in the economy.

Dr. Thugge stated that both individuals and businesses have slammed the brakes on borrowing due to the high cost of loans. He said this has informed the need to cut rates to incentivize borrowing across the economy.

Deceleration in credit to the private sector

“The MPC also noted the sharp deceleration in credit to the  private sector, and the slowdown in growth in the second quarter of 2024, and concluded that there was scope for a further easing of the monetary policy stance to support economic activity while ensuring exchange rate stability.”

The MPC's decision comes just a week after the Treasury Cabinet Secretary John Mbadi said CBK should start lowering its lending rate due to decreasing inflation in the country.

Ahead of the MPC meeting, the industry alliance Kenya Bankers' Association (KBA) said that there was room for CBK "to effect a decisive policy rate cut" to enhance economic growth by powering private sector credit uptake.

The bankers noted that private sector credit growth across the country has remained low on account of high interest rates regime and swelling record of non-performing loans. This, KBA said "threatens to slow economic growth."

According to industry statistics, the uptake of loans in Kenya's private sector slowed to 4 percent in June this year, down from 7.9 percent reported at the end of March. Consequently, the banking sector has experienced a steady deterioration in non-performing loans (NPLs) ratios to 16.34 percent from 15.5 percent reported in February 2024.

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Sectors worst hit by loan defaults

"Notable decreases in NPLs were observed in real estate, manufacturing, trade and building, agriculture and transport and communication sectors. Market concerns linger on the prospects of a further deterioration in NPL ratios should a high interest rates regime be prolonged," KBA explained in their October 3rd research note while calling for a cut in CBK's benchmark lending rate.

Additionally, CBK's policy decision on the key lending rate follows the latest official statistics showing that Kenya's inflation cooled to 3.6 percent in September compared to the 4.4 percent reported in August.

According to the CBK Governor-led MPC, the banking industry watchdog will be closely monitoring the latest adjustment to make further revisions where necessary.

"The MPC noted that overall inflation has declined further and is expected to remain below the midpoint of the target range in the near term," Dr. Kamau Thugge, CBK Governor noted in a statement.

He explained that Kenya's easing inflation numbers were attributable to stable food inflation during the month under focus as well as due to a better supply of farm produce on account of favourable weather conditions.

"A stable exchange rate, and lower fuel inflation," also contributed to easing the rate of rise in the cost of goods in the country, CBK noted.

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