Last week, the World Bank released the Kenya Economic Update in which they look into ways in which credit to the private sector can be revived in a bid to accelerate growth in the economy. The Kenyan economy is projected to rebound and reach 5.8% of GDP in 2019. In order for this trajectory to be attained, one of the risks that have to be addressed is the need to jumpstart the recovery of credit growth to the private sector; particularly to Micro, Small and Medium sized Enterprises (MSMEs) and households. During the launch of the report, the Central Bank of Kenya Governor, Patrick Njoroge noted that the resilience of the Kenyan economy is largely attributed to its strong and vibrant private sector, whose backbone is MSMEs.
The document points out the fact that although the interest rate cap was meant to reduce the cost of credit, thereby making credit accessible to a wider range of borrowers, after a year of implementation the decline in credit growth to the private sector has continued with a couple of unintended negative consequences. One of these is that banks have shifted lending to corporate clients and government at the expense of small and medium sized enterprises and personal household loans. While the interest rate cap policy was an attempt to make credit less costly and therefore more accessible to borrowers, this policy objective has not been achieved. There has been a significant credit rationing to small and medium enterprises and for unsecured personal loans, while lending to the government and lower risk large corporates has increased.
It is interesting to note that the shift in the targeting of bank loan clients away from smaller and riskier borrowers is particularly impactful in Kenya, where riskier SME and micro borrowers make up roughly 80% of all borrowers. Smaller banks, who do not have a large corporate client base, are forced to maintain their portfolios in SME and consumer lending, but have stopped lending to new and unknown customers. The introduction of the rate cap has thus led to a situation whereby there has been a significant decrease in the disbursement of consumer and unsecured loans.
One of the recommendations that are presented in as far as dealing with the shrinking level of loan disbursement is that of recalibrating the current credit reporting system through which banks will be in a better position when it comes to making decisions on loans to risky borrowers, as opposed to the blanket one-size-fits-all approach that is currently being used. They will thus be able to offer financing that is priced per the risk of the borrower. To this end, in order to strengthen credit reporting in Kenya, the CBK is already working with commercial banks on increasing the quality of their consumer data and to include credit reporting data in lending decisions.
Another measure that can be taken to this effect is improving on the overall credit reference bureau data and products. Further, other lenders should be supported to also participate in the credit reporting system, such as SACCOs and microfinance institutions. The implementation of such reforms, coupled with a well-functioning credit bureau, will significantly improve pricing transparency among banks and broadly lower interest rates.
The document states that the goal of accommodating credit worthy borrowers with a higher risk profile, including personal unsecured loans and loans to SMEs calls for a more flexible pricing regime that allows banks to competitively determine loan prices. In order for this to be achieved there needs to be improvements in the institutional environment to prohibit predatory lending, through stronger consumer protections. For example, establishing a consumer protection bureau, could equip borrowers with greater bargaining power with banks and other lenders, promote more transparent pricing practices and increase financial literacy as well as allow for more effective dispute mechanisms.
Informal Economy Analyst.