- On average, the annual interest rate for the Kenyan banking sector is within a range of 12 per cent to 14 per cent for various categories of loans offered.
- This is approximately eight percentage points higher than South Africa’s average annual rate, which stands at around four per cent.
- Some banks are extending loans with interests of up to 21 per cent, market trends indicate, with risk profiling playing out where riskier borrowers are forced to pay higher rates.
Kenya’s private sector and households are grappling with costly credit, a government report now indicates, throttling key investments by firms and individuals despite a stable financial sector. One of the main criticisms of the credit market in Kenya is that the cost of credit and the interest rate spread by the banking sector is high.
Expensive credit market in Kenya
On average, the annual interest rate for the Kenyan banking sector is within a range of 12 per cent to 14 per cent for various categories of loans offered, according to the Kenya Economic Report 2023 by the Kenya Institute for Public Policy Research and Analysis (KIPPRA).
This is approximately eight percentage points higher than South Africa’s average annual rate, which stands at around four per cent.
Some banks are extending loans with interests of up to 21 per cent, market trends indicate, with risk profiling playing out where riskier borrowers are forced to pay higher rates.
The high-interest rates came after the government revised the interest rate cap law which came into effect September 14, 2016, which was aimed at making credit market in Kenya affordable to the ‘common man’.
The cap had set the maximum interest rate charged for any credit facility to be no more than four per cent of the Central Bank Rate.The law however led to a decline in commercial banks’ profits.
“High cost of credit has been one of the major challenges hindering the growth of the private sector,” the government’s research body said in its report.
Digital lending apps
Digital lending apps have also been charging exorbitant interest rates, partly pegged on a rise in defaults. Putman et al. (2021) conducted a study on digital credit market inquiry in Kenya, which revealed the expensive nature of digital credit in Kenya. They used a sample of four digital credit providers in Kenya to measure the effective price of credit.
The study found that digital credit in Kenya is expensive, with a mean effective Annual Percentage Rate (APR) of 280.5 per cent and a median effective APR of 96.5 per cent. This is higher than the banking sector average APR for unsecured loans, which is around 24 per cent, according to the report.
Kenya’s credit markets range from well-developed commercial banks, microfinance institutions, Savings and Credit Co-Operative Societies (SACCOs), and informal channels, with the credit markets playing an important role in the economy. On a macro scale, the growth of credit facilities creates new opportunities for citizens in a country.
Strong credit markets
At a micro level, strong credit markets can improve the well-being of families by helping them smoothen incomes and expenditures, increase and diversify earnings, and accumulate assets even in the face of economic fluctuations that tend to impact them, and the classes below them, disproportionately (FSD Africa, 2016).
For firms, credit availability may have positive effects on firm productivity, as it might support productivity-enhancing strategies.
“Financing is important for firms because it helps in the expansion of operations, innovation, and investing in production facilities and new staff. Firms facing tighter credit constraints may invest less in research and development because of liquidity risk,” said Rose Ngugi, Executive Director of KIPPRA.
Access to credit market in Kenya
Access to credit can enable growth of existing micro-enterprises managed by households, and start-up of new ones, the report adds. This results in improved incomes, which enables investment in health and education.
According to financial experts, access to credit by households also enhances consumption, smoothing and bolsters resilience to shocks such as job loss, diseases, and poor harvest.
“Household debt can be, if used correctly, the grease for economic mobility. By borrowing, many more families can afford to buy a home, car, or college education than would otherwise be the case,”,” KIPPRA noted.
For consumers in any country, the decision to enter the debt market depends on both demand and supply factors. Moreover, debt allows families to smoothen out income fluctuations due to short-term spells of unemployment, and a medical emergency, among others (Weller, 2008).
On the demand side, consumers’ desire to borrow will determine their probability of participating in the credit market. On the supply side, lenders will decide whether and how much to lend, considering the capacity of their potential borrowers to repay. Actual debt observed is the result of both demand and supply factors.
According to the IMF, it will be lower than desired if consumers are not able to obtain the credit they want, due either to quantity rationing or the high price of credits.
In August, the Central Bank of Kenya’s top decision-making organ, the Monetary Policy Committee (MPC), retained its interest rates at 10.50 per cent, having gone up from 9.50 per cent in June.
This was part of measures to tame the high inflation that was being experienced in the country, hitting a high of 9.6 per cent in October last year.
Inflation, which measures the cost of living, stood at 6.8 per cent in September up from 6.7 per cent in August. This is according to data by the Kenya National Bureau of Statistics.
“The Committee further noted that the impact of the tightening of monetary policy in June 2023 to anchor inflationary expectations was still transmitting in the economy. Given these developments, the MPC decided to retain the Central Bank Rate (CBR) at 10.50 percent,” CBK governor Dr Kamau Thugge said.
The MPC met on August 9, against a backdrop of continued global uncertainties, high but easing inflationary pressures, a weak global growth outlook, geopolitical tensions, and measures taken by authorities around the world in response to these developments.
It reviewed the outcomes of its previous decisions and measures implemented to mitigate the adverse economic impact and financial disruptions.
According to CBK, the global growth outlook will decelerate from 3.5 per cent in 2022 to three per cent in 2023. This reflects the impact of the tightening of monetary policy, and escalation of geopolitical tensions particularly the ongoing war in Ukraine.
Additionally, headline inflation rates in advanced economies have continued to ease, but have remained above the respective targets with persistent core inflationary pressures. Commodity prices in the global markets, particularly of oil and food, remain below the peak levels witnessed in 2022.
Banking sector and credit access
CBK indicates the country’s banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios. The ratio of gross non-performing loans (NPLs) to gross loans stood at 14.5 per cent in June 2023 compared to 14.9 percent in May, based on the latest CBK’s update.
NPLs have decreased in transport and communication, agriculture, manufacturing, and personal and household sectors. However, banks continue to make adequate provisions for the NPLs. Growth in private sector credit stood at 12.2 per cent in June 2023 and 13.2 per cent in May.
“Strong credit growth was observed in manufacturing (18.0 percent), transport and communication (19.9 percent), trade (12.5 percent), and consumer durables (11.8 percent),” CBK said in its post-MPC update.
The number of loan applications and approvals remained strong, reflecting resilience in economic activities, it noted.
Apart from encouraging economic growth, consumer credit can cushion individual families from downturns. according to KIPPRA consumer credit helps in smoothing consumption and enabling better job searches after retrenchment. In Africa, credit can help enable livelihood shifts, especially from agriculture to small enterprises.
“It can also help finance education spending, important for the upward mobility of the next generation. Both choices shift away from agriculture and increase education spending, which are characteristics of movements towards a middle class,” the institute said.
According to the 2021 FinAccess Report, mobile money was the most used financial platform as of 2021. Mobile money accounted for 81.4 per cent of users, followed by banking institutions at 44.1 per cent, then informal groups at 28.7 per cent.
However, the usage of digital loan apps declined to 2.1 per cent in 2021, from 8.3 per cent in 2019. This was mainly due to increased competition from bank-based product innovations, unfair debt collection practices by the Digital Loan Apps, non-listing of borrowers to the Credit Reference Bureaus (CRBs), and anticipated regulation of the Apps by the CBK. The credit market in Kenya offers several products to customers. They can use some of these products in periods of emergencies or high cost of living.