NAIROBI, Aug 2 (Reuters) - Lending by Kenya's commercial banks rose steadily between April and June, almost doubling the lending growth during the same period last year, but remained below desirable levels, the central bank's Monetary Policy Committee (MPC) said on Monday.
East Africa’s largest economy is struggling to bring commercial lending rates lower to stimulate greater credit expansion while facing a key referendum on a new constitution later this week. Investors see a ‘yes’ vote as important for stability.
Separate data on Monday showed Kenya’s inflation rate ticking up slightly to 3.6 percent in July from 3.5 percent a month earlier due to higher food and beverage prices, but analysts said it was expected to steady.
Gross bank loans increased by 30 billion shillings ($373.8 million) between April and June 2010 to 828 billion shillings, with more than a quarter taken on by the manufacturing sector. Domestic credit grew by 26.6 percent in the first half of 2010.
"The growth of credit to the private sector, though, was noted to be below what is desirable for a high growth trajectory," the MPC said in a written statement.
Central bank Governor Njuguna Ndung’u told a news conference that last week’s cut in the bank’s benchmark lending rate (CBR) by 75 basis point to 6 percent was to stimulate credit growth amid benign inflation and worries about the high level of commercial bank lending rates.
"Despite (the) reduction in lending rates … there is scope for banks to lower rates. We are quite concerned about this," he said.
While the central bank has made seven cuts totalling 3 percent to its lending rate since it began a cycle of easing in December 2008, commercial banks have been slow to follow.
Latest central bank figures put the average commercial bank lending rate at 14.39 percent in June.
MARKET INEFFICIENCY
Ndung’u said the spread between commercial banks’ rates was increasing as deposit rates fell more sharply than lending rates. "These spreads signal inefficiency," he said.
At 1310 GMT, Kenya’s shilling traded at 80.15/25, up slightly on Friday’s closing price of 80.30/40 amid growing optimism Wednesday’s referendum on a new constitution would be peaceful after the final campaign rallies passed off without trouble this weekend.
Stocks on the Nairobi Stock Exchange’s benchmark 20 share Index climbed 1.27 percent to 4494.78 points.
A central bank market survey showed 41 percent of banks saw credit expansion of more than 10 percent by the end of 2010 and more than half of private firms expected their demands for loans to rise by more than 10 percent during the same period, the MPC statement said.
The same study also showed that Kenya’s private sector is more optimistic the economy will expand by more than 5 percent in 2010 against 2.6 percent last year thanks to a rebound in agriculture and manufacturing.
The poll in July showed that 17 percent of those polled saw gross domestic product above 5 percent, nearly double the 9 percent of those surveyed in May, the MPC said.
"We are getting out of the trough faster than we thought," Ndung’u said in reference to economic growth.
Separately on Monday, month-on-month food and non-alcoholic drinks prices rose 0.5 percent while alcoholic beverages and tobacco costs were up 1.2 percent on June.
"There are pressures both ways so it (inflation rate) could remain within a fairly narrow range," said Nairobi-based independent economist Robert Shaw.
Inflation has been slowing across east Africa most of 2010, largely due to easing food prices as a result of heavy rains and increased harvests.
The next rains in Kenya, usually short in duration, are expected around November. "If they are deficient, it could exert pressure on food prices," Shaw said.
