Will 50bps rate cut revive Kenya’s struggling private sector lending?

Kenya's Monetary Policy Committee recently announced a 50-basis-point rate cut, reducing the Central Bank Rate to 10.75 per cent. This decision was accompanied by a decrease in the cash reserve ratio, aimed at boosting liquidity in the banking sector. The move is seen as a step towards revitalizing private sector lending in the country, which has been struggling amidst the current economic challenges. To delve deeper into the implications of this policy shift and its potential impact on credit growth, Declan Galvin, Managing Director at Exigent Risk Advisory, joined CNBC Africa for an insightful discussion. Galvin expressed optimism regarding the rate cut, emphasizing its importance in light of both domestic and global economic conditions. With the upcoming growing season and President Ruto's agricultural agenda, access to affordable capital is crucial for farmers and businesses. The reduction in interest rates, particularly for trade financing loans, is expected to provide the necessary stimulus for growth and development in various sectors. While banks have cited risk aversion as a reason for the low levels of private sector lending, Galvin believes that there are alternative strategies beyond interest rate adjustments to mitigate risk. He highlighted the need for banks to explore various methods to support businesses with affordable capital, ultimately fueling economic expansion. Access to affordable capital remains a significant challenge across Africa, including Kenya, and addressing this issue is crucial for sustainable growth. The issue of non-performing loans was also addressed during the discussion. Galvin pointed out that non-payment and non-performance of loans can be attributed to factors beyond just increased lending. He stressed the importance of robust due diligence, Know Your Customer (KYC) practices, and credit assessments to manage risks effectively. In terms of inflation and exchange rate risks, the Central Bank's confidence in reducing interest rates is supported by their belief that inflation is under control. Factors such as forex reserves, euro bond payments, and bilateral debt have influenced inflation volatility in the past, but with these issues resolved, there is greater potential for economic management and growth. Overall, the rate cut decision by Kenya's Central Bank signals a proactive approach to addressing the challenges faced by the private sector. By injecting liquidity and reducing interest rates, the aim is to boost lending activity and stimulate economic activity. While banks may initially exhibit risk aversion, exploring diverse strategies to support businesses with affordable capital is vital for driving sustainable growth and development in the country.