The IMF expects private sector lending to recover in 2025

Private sector credit growth has collapsed due to high interest rates and loan defaults, registering a meager improvement of 1.3 percent in August this year.

The marginal growth in private sector credit in August is comparable to the era of interest rate caps on commercial bank loans between June 2016 and November 2019, when lenders exercised restraint in issuing loans at interest rates set to the benchmark rate.

CBK cut lending rates to a flat 12 percent from 12.75 percent last month in a bid to restore credit demand in the economy.

The apex bank had earlier raised the benchmark as a remedy against runaway inflation and exchange rate volatility, taking interest rates to a high of 13 percent in February this year.

The IMF has highlighted CBK’s move to reaffirm price stability as positive, even as it looks for new solutions to high credit losses, with the non-performing loan (NPL) rate remaining at an 18-year high in August 16.7 percent.

“The CBK’s decisive actions have supported price stability and external sustainability, including through institutional changes to improve the functioning of the monetary policy operational framework and money and currency markets,” noted IMF First Deputy Managing Director Gita Gopinath on.

“Exchange rate flexibility is crucial to improve resilience to external shocks and competitiveness. Addressing banks’ deteriorating asset quality and emerging risks requires close monitoring and enhanced supervision.”

CBK expects banks to follow their indicative policy stance and cut interest rates on commercial loans to ease the burden on customers choked by steep borrowing costs.

CBK Governor Kamau Thugge said he had called on bank CEOs last month to allay concerns that interest rates had not responded to cuts in the benchmark rate.

The push to cut interest rates for commercial banks comes as a result of lobbying by President William Ruto and Finance Minister John Mbadi, who see cheaper credit anchoring the recovery in economic output.

“We have agreed with the commercial banks that we will hold a meeting to brainstorm to ensure that, given the low inflation and CBR, banks offer lower interest rates to borrowers. With inflation steadily declining and CBK easing monetary policy, there is absolutely no reason why commercial banks should not adopt lower interest rates,” Dr Thugge said on October 15.