Private sector credit growth collapsed due to high interest rates and defaults, registering a weak improvement of 1.3 percent in August this year.

The marginal growth in private sector credit in August compares with the era of interest rate caps on commercial bank loans between June 2016 and November 2019, when lenders were prevented from issuing fixed-rate loans at the benchmark rate.

CBK last month cut its benchmark lending rate from 12.75 percent to a flat 12 percent in a move aimed at restoring credit demand in the economy.

The apex bank previously raised the benchmark as a remedy to runaway inflation and currency volatility, taking the rate to a peak of 13% in February this year.

The IMF highlighted the CBK’s move to affirm price stability as a positive, even as it seeks to see further remedies to high loan impairment, with the share of non-performing loans (NPLs) remaining at an 18-year high of 16.7% in the month August.

“CBK’s decisive actions supported price stability and external sustainability, including through institutional changes to improve the functioning of the operational framework of monetary policy and money and foreign exchange markets,” noted IMF First Deputy Managing Director Gita Gopinath.

“Exchange rate flexibility is vital to improve resilience to external shocks and competitiveness. Addressing the deterioration of banks’ asset quality and emerging risks requires close monitoring and strengthened supervision.”

The CBK expects banks to follow its policy stance and reduce the interest rate on commercial loans to ease customers suffocated by high borrowing costs.

CBK Governor Kamau Thugge said he had summoned bank chief executives last month to address concerns that lending rates had not responded to benchmark rate cuts.

The push to lower commercial bank lending rates follows lobbying by President William Ruto and Treasury Cabinet Secretary John Mbadi, who see cheaper credit as anchoring a rebound in economic output.

“We have agreed with the commercial banks that we will have a brainstorming meeting to ensure that with low inflation and the CBR, banks extend lower interest rates to borrowers. With inflation steadily falling and the CBK easing monetary policy, there is absolutely no reason not to have lower interest rates by commercial banks,” Dr Thugge said on 15 October.