Kenya’s Private Sector Credit Growth by banks has been on an upward trajectory increasing by 12.2% YoY in September 2023, but there is a lot of room for growth
Private sector credit from the banking sector as of September 203 stands at Kshs 3.8 tn, equivalent to approximately 31.5% of the GDP. This continues to lag behind other advanced economies such as USA where the Private sector credit from banks to GDP ratio stood at 51.6% in 2022. As of July 2023, private sector credit from banks stood at Kshs 3.6 tn, equivalent to 82.9% of the total Kshs 4.4 tn private sector credit for the same period, while the remaining 17.1% came from Saccos and Microfinance. Kenya has some work to do to bridge the gap in Private sector credit. Below is the private sector growth performance and the recommendations on how to improve it;
1.Private Sector Credit Growth Performance
There has been a significant rise in banks’ lending to the private sector over the years, with the total domestic credit extended to the private sector credit increasing to Kshs 3.8 tn in September 2023. The chart below shows total credit to private sector from banks growth with an 8-year CAGR of 9.2%;
Source: Central Bank of Kenya
In terms of Private sector credit growth, y/y credit growth as at September 2023 came in at 12.2%, but below the historical levels, such as 25.8% in June 2014 as seen below. The chart below shows the movement of the private sector credit growth;
Source: Central Bank of Kenya
The graph below shows the comparison of Kenya’s total domestic credit to private sector as a percentage of GDP in comparison to selected countries;
Source: World Bank
- Factors that have influenced Private Sector Credit growth
- Interest rates – Interest rates affects supply side of the credit market. For instance, the capping of interest rates in August 2016 led to low credit growth averaging at 3.7% for the capping period (August 2016-November 2019) with banks minimizing credit access due to the small profit margins. Additionally, high interest rates stifle the demand side of the credit market by increasing the cost of borrowing,
- Government domestic borrowing - Commercial banks have continued to hold the highest proportion of Government domestic debt, coming at 44.2% as at November 2023, due to the risk-free nature of the investment, effectively crowding out the private sector, which is considered riskier,
- High risk perception by lenders which contribute to high risk premiums – Commercial banks charge higher interest premiums on the loans borrowed, driven by increased credit risk. According to the Central Bank of Kenya (CBK), the tightened macroeconomic environment in 2023 has resulted in increased credit risks as banks recorded deteriorating asset quality with non-performing loans (NPLs) to gross loans ratio coming in at 14.5% in Q2’2023, above the historical average of 9.7%,
- High cost of credit – there are other associated overhead costs incurred during borrowing such as bank fees, legal fees and government levies, valuation fees and insurance that are borne by the borrower, in addition to the interest charged on loans,
- Over-reliance on the banking sector - The Kenyan private sector is over dependent on lending from commercial banks due to under development of alternative sources of funding as of July 2023, the banking sector provided 82.9% of capital to businesses while Saccos and Microfinance contributed 17.1%, and,
- Elevated inflation rates– Central banks, in response to high inflation, may implement measures such as raising the benchmark interest rate which influences the overall cost of borrowing for businesses and individuals. For instance, Following the heightened inflation rate of 7.9% as of June 2023, the central Bank of Kenya revised the Central Bank Rate (CBR) to 10.5%. This adjustment has had a direct impact on interest rates set by commercial banks for loans, leading to an increase in the cost of borrowing,
- Recommendations to enhance Private Sector Credit Growth
The private sector is a significant contributor to the Kenyan GDP. However, credit availability remains a major hindrance for the sector’s growth. Below are some of the recommendations that the government can adopt;
- Policy reforms- Through implementing policies that enhance the ease of doing businesses, reducing bureaucratic hurdles, and creating a favourable regulatory environment can encourage banks and other lending institutions to extend credit to the private sector,
- Enhance financial literacy to the public – The government needs to come up with ways of promoting financial literacy among the population and businesses can increase awareness of available credit options as well as improve creditworthiness, making it easier for businesses to access credit,
- Establish a regulatory framework to enhance consumer protection by enforcing consumer-centred financial laws, ensuring financial products are transparent and competitive, as well as handling of consumers complains and issues,
- Develop the capital markets to offer alternative sources of borrowing – The capital market in Kenya is under-developed as it contributes minimal funding to businesses in Kenya. Deeping the capital markets framework will unlock a key financing avenue that businesses can tap into. Further, the government, in conjunction, with the financial sector regulators need to come up with a sound legal framework to promote transparency of the corporate bond market bonds, as well as investor education on key legislations that apply to the specific bond market,
- Enhancing oversight on fund initiatives to promote transparency - The government needs to come up with measures or an independent institution that will oversee the running of funds such as the Hustler Fund, Uwezo Fund and Youth Development Fund in terms of timely publication of updates on amounts disbursed, disclosure of beneficiaries already covered and requirement regulations. The strategy will help in building confidence with the public, as well as preserving tax payers’ money, and,
- Adoption of concessionary loans - Allow the banking sector to provide concessionary loans to small and medium enterprises with focus on the Agricultural sector as it is the leading contributor to the GDP and accounts for 70.0% of employment of the rural population.
For more information, kindly see our topical on Private Sector Credit Growth
