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Banks blame high defaults for slow pace of loan rate cuts
Kenya Bankers Association (KBA) views further rate cuts as part of initiatives to lower interest rates on borrowing further alongside measures such as clearing pending bills.
Commercial banks have blamed the prevailing high default rates for the slow pace at which the industry is cutting interest rates on loans to customers.
The banks represented by the Kenya Bankers Association (KBA) lobby state that the persistence of high defaults means a greater risk profile for borrowers under the risk-based credit pricing formula, prompting the lenders to keep their loan costs high.
The industry’s non-performing loans (NPL) ratio remained largely unchanged at 16.5 percent in October 2024 from 16.7 percent in August, sticking to a near two-decade record.
“With the industry NPL ratio remaining elevated at 16.5 percent, the ongoing lending rate adjustments for the less risky segments would be moderated by minimal adjustments on the sectors perceived to be riskier,” KBA said in a pre-monetary policy note published on Wednesday.
Interest rates on commercial bank loans have remained largely elevated despite easing slightly in December, as lenders struggle to pass on the benefit of receding domestic rates to customers.
The overall weighted average lending rates by commercial banks eased slightly to a mean rate of 16.73 percent in December from 16.91 percent in November.
The meagre drop is despite the Central Bank of Kenya (CBK) cutting the benchmark interest rate by 0.75 percent, from 12 percent to 11.25 percent at its December monetary policy committee (MPC) meeting.
KBA has called for a further Central Bank Rate (CBR) cut to stimulate credit-led economic activity.
The banking sector lobby views further rate cuts as part of initiatives to lower interest rates on borrowing further alongside measures such as clearing pending bills.
“As lending rates remain elevated, credit growth remains muted. As such, there is a need to stimulate credit growth through a further cut in the CBR alongside other measures, to support the ongoing risk-based pricing framework and resolve credit market challenges, such as the long-standing pending bills to forestall a further escalation of NPLs,” KBA added.
The sectors of manufacturing, building and construction, finance and insurance and business services have suffered the largest hit from the interest rates related credit constraints over the past year.
Private sector credit fell to its lowest level in 22 years as of November last year, marking a 1.1 percent contraction, a first dip since the Daniel Moi era.
