Bankers want the benchmark lending rate maintained at 10.5 percent in the upcoming Monetary Policy Committee (MPC) review next week, cautioning that any additional rate hikes aimed at controlling potential inflationary pressures could heighten credit risk in the market.

Furthermore, they argue that raising the Central Bank Rate (CBR) may exacerbate the ongoing decline in asset quality within the banking industry. The MPC of the Central Bank of Kenya is set to establish the country's policy direction for the near future in their meeting on Tuesday, next week.

"A further rate hike to tame potential inflationary pressures – if implemented fully by banks - would further escalate credit risk in the market and a build-up in non-performing loans with detrimental effects on the industry’s stability," the Kenya Bankers Association (KBA) research note dated 29th November states in part.

Stringent monetary policy

KBA observed that the stringent monetary policy approach implemented since mid-2022 continues to influence the market, leading to a consistent increase in market interest rates.

Additionally, KBA pointed out that despite private sector credit growth remaining robust in double digits, it has slowed down primarily due to the upward trajectory of interest rates and the increasing market credit risk. This situation underscores the necessity for banks to further enhance credit standards, the lobby explained.

Meanwhile, the non-performing loans (NPL) to gross loans ratio recorded 15 percent in August 2023, compared to 14.7 percent in July 2023 and 13.3 percent in December 2022. Looking ahead, KBA said there is a likelihood that banks will roll out more stringent credit standards to check the increase in NPLs.

During the nine months leading up to September 30, bankers have experienced the disruptive impact of government austerity measures, pending bill defaults, and currency devaluation on both the banking industry and the economy.

These factors have posed a significant threat to the financial institutions' profitability. In the Third Quarter, Kenya's top four lenders encountered a surge in bad loans, resulting in a decline in profits. Equity Bank Kenya experienced a 19.9 percent decrease in profits to Kes19.3 billion, NCBA saw a 3.6 percent earnings ease to Kes12.5 billion, as KCB Bank Kenya witnessed a 9 percent reduction in profits, amounting to Kes23.9 billion.

In August, loans to the private sector experienced a rise to 12.6 percent, up from 10.3 percent a month earlier. This growth was primarily fueled by increased loan uptake in the manufacturing, transport, and communication sectors, which saw respective increments of 19.6 percent and 24.9 percent.

Read also: Bankers caught in the domino effect of the falling shilling

Inflation in Kenya

Despite Kenya's inflation remaining within the CBK's target range of 5±2.5 percent, it experienced a slight increase in October, reaching 6.9 percent compared to 6.8 percent in September and 6.7 percent in August 2023.

During the same period, food inflation saw a decrease from 7.9 percent in September to 7.8 percent in October. However, there were concerns about the rising fuel inflation, which climbed to 14.1 percent in October, up from 13.1 percent in September.

Bankers observed a deceleration in Kenya's economic growth momentum, particularly in the second half of 2023. Although the country achieved a robust growth rate of 5.4 percent in the second quarter, it represented a slight dip from the 5.2 percent growth recorded during a corresponding period a year ago.

The strong growth in the second quarter was driven by the ongoing recovery of the agriculture industry, which expanded by 7.7 percent. This growth was fueled by favorable weather conditions, in stark contrast to the contraction of the sector by 2.4 percent during the same period in 2022 owing to severe drought.

Forex reserves

While Kenya's current account deficit showed a slight improvement, narrowing to $4.3 million in July 2023 from a deficit of $5.9 million in July 2022, bankers expressed concerns about the "waning confidence" in the capability of Kenyan policymakers to effectively manage emerging short-term forex market shocks due to falling shilling.

According to Bloomberg, Kenya Shilling has depreciated 18 percent this year against the US Dollar. The CBK is currently quoting it at 153.0618 to the greenback.

As of November 16, 2023, data shows that Kenya's forex reserves totaled $6.78 billion, equivalent to 3.64 months of import cover, slightly below the CBK's minimum statutory requirement of 4 months.

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