Banks will commit a third of their extra cash to private sector lending, a shift from the increased focus on long-dated government debt in a move that signals increased optimism in the economy.
Bank executives informed the Central Bank of Kenya (CBK) through the quarterly credit survey indicated that they will channel 33 percent of the extra liquidity to lending to businesses and households and 20 percent to buying Treasury bonds in the three months to March.
This is a departure from the credit structure of the third quarter where banks intended to channel 29 percent of their cash to the private sector and 22 percent to buying Treasury bonds, which bankers expected to absorb 27 percent of their liquidity for the three months to September.
The quarter-one outlook shows that banks were optimistic about increased demand for loans from businesses seeking capital for expansion. This is emerging in a period when banks have started adjusting their lending rates upwards after CBK allowed them to factor in the risk profile of the customers when pricing their loans, promising lenders higher interest income.
Banks are cutting back on long-dated government papers or bonds in favour of Treasury Bills and private-sector lending.
“Several banks intend to deploy the additional liquidity towards lending to the private sector (33 percent), investing in Treasury Bills (22 percent), investing in Treasury Bonds (20 percent), interbank lending (18 percent), CBK liquidity management through repos (5 percent), and increase their cash holdings (2 percent),” said the Central bank in reference to the bankers improved liquidity.
The forecast allocation of about a third of the extra cash to private lending could be the highest in over five years. Small and medium businesses have long complained about a lack of access to credit, or of being charged high interest rates due to a perception by lenders that they are too risky.
The delayed shift to risk-based lending, bankers say, had forced many of them to deepen investment in government securities and restrict lending to high-quality customers with a lower risk of default. The banks have reviewed the base rates and some have successfully applied to the CBK to revise upwards the risk premium in what could end the era of cheap credit.
Banks use a base rate which is normally the cost of funds, plus a margin and a risk premium, to determine how much they charge a particular customer. The average lending rate stood at 12.64 percent in November, the highest since August 2018 when it was 12.7 percent.