Banks in 2024 issued more loans to cover household expenses such as furnishing homes, education and medical bills than starting and growing businesses for the first time in six years, reflecting a softening economic setting that prompted firms to defer projects.
Credit to households, usually secured by pay slips and individual assets, expanded by 9.2 percent, or Sh48.2 billion, to Sh572.3 billion in the year to December, according to data by the Central Bank of Kenya (CBK).
The flow of credit to household needs was the fastest among the broad sectors tracked by the banking regulator, reflecting the impact of prohibitive cost of borrowing amid reduced demand for goods and services.
The CBK data showed that lending to trade decelerated, while funding to manufacturing contracted for the first time in at least a decade.
That marked the first time since 2018 that households borrowed more money from banks than traders, an analysis of the data shows.
“In an environment where many shifts and shocks happened, a deceleration in industry credit is a concern that we must all get nervous about. With heightened interest rates, clients find it difficult to continue with [investment] activities,” Joshua Oigara, the CEO of Stanbic Bank Kenya and South Sudan, said on March 5.
“But as [lending] rates come down, it is going to result in vibrancy in the economy and see an uptake of loans.”
Total credit issued to the private sector dropped 1.37 percent to nearly Sh3.86 trillion in the year ended December, marking the first annual contraction in the review period since 2001.
The rare contraction has been largely attributed to the prohibitive cost of borrowing after the CBK kept benchmark interest rates elevated to rein in inflation, prompting businesses to postpone investment projects.
The elevated default rates of more than 16 percent also pushed banks to tighten credit standards, locking out borrowers with a high risk of default.
The value of dollar-denominated loans in sectors such as finance and insurance, manufacturing, building and construction as well as trade also contracted after the shilling gained about 17.6 percent against the US dollar. That meant the value of dollar-denominated assets, including loans, reduced by similar margins when converted to shillings.
The CBK data shows that total credit to the manufacturing sector fell by the most by Sh59.6 billion in the year ended December to close at Sh577.1 billion — a contraction of 9.36 percent from Sh636.7 billion a year earlier.
This was followed by the finance and insurance sector where credit flow contracted by Sh40 billion, or 21.15 percent, to Sh149.1 billion, business services (Sh9.7 billion or 4.52 percent to Sh205.1 billion) and building & construction (Sh8.8 billion or 6.14 percent to Sh134.5 billion).
Other sectors that recorded a decline in the value of credit flow are mining and quarrying by Sh5.9 billion, or 22.7 percent to Sh20.1 billion, and ‘other activities’ whose bank funding dipped to Sh116.8 billion from Sh142.7 billion in December 2023.
The growth in loans to the trade sector, which accounts for the largest share of the outstanding credit stock, decelerated to Sh15.4 billion, or 2.32 percent, to Sh678.8 billion during the review period.
Lending to transport and communications grew by Sh5.8 billion or 1.60 percent to Sh367.2 billion, real estate by 1.3 percent to Sh458.4 billion, while loans against consumer durables expanded by 3.3 percent to Sh429.2 billion.
A slowdown in lending implies slower economic growth as most investments and consumption are funded by credit, mainly from commercial banks.
Growth in Kenya’s economic output is estimated to have slowed to 4.6 percent last year from 5.6 percent in 2023, according to the Treasury.
This came in a year when businesses complained of reduced sales for most of the year, citing eroded consumer purchasing power due to increased taxation and statutory deductions from pay slips, exacerbated by economic uncertainty following deadly anti-government protests.
Treasury Cabinet Secretary John Mbadi acknowledged that the economy grappled with cash flow challenges in 2024, partly because of piling pending bills to government suppliers and contractors. This was compounded by elevated cost of borrowing, which made access to capital especially for small businesses difficult.
“Why Kenyans feel they don’t have money in their pockets is what we must deal with. And I have talked about pending bills, which are hurting and choking this economy and we are dealing with that,” Mr Mbadi said in an earlier engagement. “But the second, which is now starting to look good, is interest rates. We have started to see a fall in interest rates.”
