Manufacturing sees biggest drop in loans of 39 billion shillings

The decline is almost half of the 82.2 billion shilling decline in the private sector in the first quarter of the year, with the segment’s loan portfolio shrinking to 3.829 trillion shillings from 3.911 trillion shillings.

The fall in credit to goods producers represents a deepening setback for the sector, which grew at its slowest pace in 16 years, at 1.3 percent in the first quarter, hit by high costs and new taxes.

The sector recorded its slowest growth rate since the 2008 post-election unrest as market participants felt the effects of higher-priced inputs and new tax measures such as an export and promotion tax.

Cement companies other than Bamburi, Mombasa and Simba Cement, which produce their own clinker, faced higher costs, which hit product volumes, with production falling to 2.1 million tonnes in the first quarter ended March from 2.3 million tonnes a year earlier.

Private sector lending has been hampered by high interest rates and rising defaults. These factors combine to make it impossible for some borrowers to borrow, and the high amounts of outstanding loans have in turn led to tighter credit standards from banks.

Lending to the private sector was also affected by the appreciation of the Kenyan shilling, which resulted in a reduction in the portfolio of foreign currency loans, which included part of the loans taken out in the manufacturing sector.

Households defied the slowdown in credit growth, with the subsector seeing its loan portfolio grow by 42 billion shillings in the quarter.

“Non-performing loans are expected to remain stable in eight sectors of the economy, increase in the personal and household and trade sectors and decline in transport and communication over the next quarter. Credit standards remained unchanged in 10 sectors of the economy in the first quarter of 2024. Credit standards for the personal and household sectors were tightened,” the Central Bank of Kenya notes in its latest credit survey.

In June, CBK recorded an increase in the number of defaults in the agriculture, real estate, tourism, catering and hotel, trade and construction sectors.

The mining and quarrying, consumer durables and business services sectors also lagged behind, with the only increases in these sectors being recorded at 5.3 billion shillings, 0.6 billion shillings and 3.7 billion shillings.

Credit fell in all other sectors of the economy, with the trade credit portfolio shrinking by 17.8 billion shillings, the transport and communication credit portfolio shrinking by 20.6 billion shillings, while finance and insurance and real estate credit fell by 24.6 billion shillings and 11.6 billion shillings respectively.

Gross outstanding loans topped 641.3 billion shillings at the end of March, up from 621.3 billion shillings in December, while the default rate hit an 18-year high of 16.1 per cent in April.

Businesses and households are struggling to meet debt obligations in a high interest rate environment, even as economic conditions remain weak and consumers are seeing falling disposable income, justifying a reduction in discretionary spending.

Meanwhile, the high interest rates resulted from the increase in the CBK reference interest rate from 9.5 percent in June last year to 13 percent currently.

CBK expects its actions to maintain low credit growth in the second half of 2024.

“Growth in credit to the private sector is expected to remain moderate in the near term, consistent with tight monetary policy,” the CBK noted in its Monetary Policy Committee’s half-yearly report for April.