NAIROBI, KENYA, MAR 19 — The Central Bank of Kenya has cut its base lending rate by 50 basis points in the latest review by the Monetary Policy Committee, catching banks by surprise under the interest rate cap regime.
The MPC on Monday reduced the Central Bank Rate to 9.50 per cent from 10 per cent, the first time in 18 months.
This means that banks cannot charge interests more than 13.5 per cent, on loans, under the law that caps interest rates at four percentage points above the CBR.
This is under the Banking (Amendment) Act, 2016, which came into force on September 14 last year.
“The MPC noted that inflation expectations were well anchored within the government target range, the increased optimism for growth prospects in the economy, and that economic output was below its potential level. Therefore, it concluded that there was scope for easing its monetary policy stance in order to support economic activity,” the committee said in a statement.
The capping of interest rate has however been blamed for a credit crunch to individual borrowers and the Small and Medium-sized Enterprises who are regarded high risk borrowers by banks, a move blame for slowing down economic growth in the country.
The law has also denied banks the much earnings they used to reap when rates were as high as 25 per cent at some institutions, a move that has seen most lenders report low profits.
The MPC, chaired by CBK governor Patrick Njoroge, however said on Monday that the banking sector remains stable and resilient.
Average commercial banks’ liquidity and capital adequacy ratios stood at 44.6 per cent and 18.5 per cent respectively, the committee noted.
According to the CBK, private sector credit grew by 2.1 per cent in the 12 months to February 2018.
Lending to the manufacturing, real estate and trade sectors remained relatively strong, growing by 13.1 per cent , 8.3 per cent and 5.9 per cent respectively.
The ratio of gross non-performing loans (NPLs) to gross loans however increased to 11.4 per cent in February 2018 from 10.6 per cent in December 2017, largely due to increased NPLs in the manufacturing sector and loan repayments in the transport and communication sectors.
The International Monetary Fund and the banking sector have called for a review of the rate cap law, a move likely to be implemented soon on the fact that even the National Treasury has admitted that it is unsustainable.
The law which was meant to make credit cheaper to borrowers has instead ended up denying majority of Kenyans credit, as banks prefer lending to the government.
Low private sector credit growth remains a key concern, according to investment firm Cytonn, which has note that though growth improved slightly to 2.4 per cent as at December from 2.0 per cent in October 2017, it is still below the government set annual target of 18.3 per cent.