This archive report was first published on 10 September 2019.
Banks' Cash Reserves Soar Amid Private Sector Credit Crunch ¶
As of June 30, 2019, commercial banks in Kenya were holding a record-high average liquidity of 50.3 percent, up from 44.1 percent in the same period in 2018.
This surge in cash reserves has been driven by a high subscription rate to domestic debt securities, with Treasury bills and bonds seeing average subscriptions of 131.1 percent and 111.9 percent, respectively.
However, the private sector has been struggling with a cash crunch, with private sector credit growth slowing to 4.2 percent in the first half of 2019, down from 2.9 percent in the same period in 2018.
The interest rate capping environment, enacted in September 2016, has been cited as a major contributor to the decline in private sector credit growth. Banks have been reluctant to lend to the private sector, instead opting to invest in risk-free government securities.
Despite the challenges, banks have been able to maintain their profitability through aggressive lending and deposit mobilization, as well as a push towards non-interest income.
However, asset quality has remained a concern, with non-performing loans rising to 12.7 percent in the first half of 2019, up from 5.6 percent in 2014.
As the interest rate capping law continues to be a topic of debate, banks are expected to shift their focus towards the private sector, with Sterling Capital predicting a gradual increase in private sector credit growth.
However, the lifting of the interest rate cap is still a contentious issue, with parliament maintaining its authority to prevent customer exploitation by commercial banks.
Commercial banks have backed reforms in the sector, including the push towards a fair and transparent lending regime under the Central Bank of Kenya's Banking Sector Charter.
