By VINCENT OWINO

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Outstanding banking sector loans to households in Kenya dropped by Ksh13.7 billion ($89 million) in December last year, a rare downturn highlighting the impact of the high interest rates resulting from the series of policy rate hikes by the Central Bank of Kenya (CBK).

The loans extended to private households by commercial banks, saccos, and microfinance banks, have been rising consistently for the past 14 months, but took a rare decline in December, falling 1.14 percent, data from CBK shows.

Analysts say this is a direct result of the increased cost of borrowing, coming after the CBK raised its interest rates by 200 basis points in December following a series of persistent hikes, which saw commercial bank lending rates rise from 12.22 percent in May 2022 to at least 14.63 percent by the end of last year.

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“Higher interest rates often dampen consumer sentiment, leading households to become more cautious about taking on additional debt for discretionary spending, such as home improvements or luxury purchases,” avers Stellar Swakei, senior research associate at Standard Investment Bank.

“Typically, household borrowers are perceived to be riskier than large entities or established businesses, and based on the risk-based model, there is an additional premium that they have to pay in terms of interest, implying that the cost of borrowing becomes way higher for them.”

CBK raised the rate at which it lends to commercial banks thrice last year – by a total of 375 basis points – from 8.75 percent at the beginning of the year to 12.5 percent in December, causing the domestic lenders to also increase their lending rates.

The apex bank first raised the policy rate by 50 basis points in May 2022 after it remained constant at seven percent for over 24 months, but it appears to have had no effect on the private sector credit until last December.

After the first raise in May 2022, credit to private households dipped by Ksh2 billion ($13.7 million) the following month, but started rising again, increasing by a total of Ksh55.7 billion ($381 million) by the end of the year.

The downturn in household credit had, however, been foreseen by commercial banks last year, as a cocktail of economic conditions, including the rising cost of credit, conspired against private sector credit growth.

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According to the CBK’s “Market Perceptions Survey” carried out in November 2023, the number of banks that expected private sector credit to grow had declined from 26 percent a year earlier to 11 percent.

Dampened credit growth

At the same time, nine percent more banks expected private sector credit growth to dampen in December 2023 and January 2024, highlighting the expected slump as the economic situation worsened.

“Banks expect demand for credit to be dampened by reduced incomes, high interest rates and increased cost of borrowing, the weakening of the shilling, likely to impact negatively on trade activities and cause importers to adopt a wait and see attitude,” CBK said in the survey.

However, the total loans by banks to private sector continued to grow, posting a 13.5 percent year-on-year growth to Ksh4.7 trillion ($32 billion). Loans to the agriculture sector posted the most growth, at 22 percent, followed by manufacturing, at 20.8 percent.

The annual growth for household credit decelerated to 7.4 percent, the slowest in over 12 months, highlighting the impact of the December downturn on the year’s credit overall growth.

Ms Swakei argues that while the slump could mean that the CBK has finally succeeded in using monetary policy to rein in inflation by controlling liquidity, it is a double-edged sword and could have far-reaching consequences for the economy in the long run.

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“The phenomenon may be a signal of a slowdown in consumer spending and investments, which are major drivers of an economy, and in the short to medium term could mean a potential economic slowdown,” she said.

“A significant decrease in borrowing may signal reduced confidence among consumers and businesses, leading to lower spending, investment, and overall economic activity. Ballooning borrowing costs serve as shackles on economic expansion.”

Private household borrowing currently constitute the highest share of banking system loans to the private sector, currently accounting for 25 percent of all credits to the sector.