Banks Support CBK Rates Rise in an Attempt to Stop Non-Performing Loans

The Kenya Bankers Association (KBA) has urged for the Central Bank of Kenya to tighten monetary policy further, describing it as a treatment for high non-performing loans.

The apex bank maintained the benchmark Central Bank Rate (CBR) at 10.5 percent in August, observing that the effects of previous interest rate increases were sufficient.

The banking industry association claims that a further hike in the benchmark lending rate will reduce credit demand and stop the accumulation of problematic loans.

“We argue that a further (moderate) monetary policy tightening would support measures taken previously to tame inflationary pressures and rising inflationary expectations, cool off credit demand and supply while averting a sharper build-up in non-performing loans,” KBA said in a research note on Wednesday.

“Interest rates continue to edge upwards in response to the existing tight monetary policy stance. Higher interest rates are expected to raise the cost of credit thereby moderate credit demand.”

Commercial bank loan interest rates have already reached multi-year highs against a backdrop of rising interest rates generally, which has been mostly fueled by prior rate resets by the Central Bank of Kenya (CBK) and competition from government securities.

To reflect the impact of rising interest rates, the average business lending rate reached a 65-month high of 13.5 percent in July.

The impact on asset quality in the banking industry as a result of increased interest rates indicates that borrowers are unable to make loan payments.

According to CBK data, the ratio of gross non-performing loans increased slightly from 14.5 percent in June to 14.7 percent in July, signaling a decline in the industry’s asset quality.

The CBK highlighted last month that the volume of loan applications and approvals had held steady, demonstrating the durability of economic activity.

In order to equally limit the inflationary pressures brought on by variables like fuel prices, KBA has approved higher rates. The Monetary Policy Committee of CBK is scheduled to convene the following Tuesday.