Nearly one year to the day, businesses breathed a sigh of relief as resident Uhuru Kenyatta rejected the 2019 Finance Bill asking MPs to instead reconsider ending the stay of interest rate caps.

In a memo to the National Assembly, the President highlighted the severe effects of the stay of the ceiling on banking sector lending rates while informing of new credit flows in the subsequent should members ratify the memo.

Read also

• Why SME funding will be the economic rebound acid test
• Kenyan companies used the pandemic to reorganize payroll

As in the President’s liking, the taps would open in early November with banks corresponding to the government’s tune of rediscovered private sector credit flows.

Fast forward 12 months on, small and medium enterprises (SMEs) remain on hold with both government and commercial banks yet to pick up calls on new credit lines.

The unprecedented COVID-19 pandemic has since altered the desired recovery in loans to the real economy, but it is the government exerting irreparable damage with its ever increasing local borrowing program.

According to the recently approved Budget Review and Outlook Paper (BROP), the government has extended its net domestic financing program by 21.4 per cent to Sh600 billion from an originally planned Sh494.3 billion.

The extension will afford commercial banks a bigger silo to pack funds to safe haven investments under the tough operating environment.

Banks have already shifted their funds towards government securities due to inherent risks presented by their customers- this trend will only accelerate with widened government safety net.

According to an analysis of the performance of listed banks in six months to June 30 this year, lenders increased their holdings in government securities by 25.9 per cent in comparison to 12.1 per cent last year.

Kenya’s top bank KCB led the run on government securities with a 54.5 per cent increase in its treasuries portfolio.

The accumulation of government debt was higher than the rate of loans growth which stood at 14.5 per cent in the period.

Moreover, the loan to deposit ratio cooled down to 71.5 per cent from 73.8 per cent last indicating lenders go slow on new lending.

As the moratorium on the repayment of what is presently Ksh.1.12 trillion in restructured loans begins to wind up from March next year, banks are expected to remain greatly exposed to default risks.

In spite of the heavy restructures and the lowering of the of the cash reserve ratio (CRR) in March, gross non-performing loans have risen to a 12 year high of 13.6 per cent while private sector credit growth has remained at a sterile 8.3 per cent as of August compared to a 15 per cent average in the pre-cap era.

In a report published earlier this month, global credit ratings agency Fitch indicated Kenya has barely made any observable gains in driving higher credit uptake.

While the fiscal and monetary agencies represented by the National Treasury and the Central Bank of Kenya (CBK) have denied crowding out the private sector from bank funding, the evidence against their defence has been overbearing.

Curiously enough, the government has been out to trigger credit growth to the very private sector it continues to starve off by mulling credit driving initiatives such as the SME credit guarantee scheme whose implementation set originally for October will wait longer.