Rising Government Borrowing Pushes up Loan Costs for Kenyan Households and Businesses

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The Kenyan government’s increasing reliance on more expensive domestic loans has resulted in higher interest rates for households and businesses. The interest rate on a one-year Treasury bill, which serves as a benchmark for determining borrowing costs, reached its highest level since February 2016. Investors are demanding higher margins to hold government securities due to rising inflation and limited access to external financing. As a result, commercial banks are likely to charge higher interest rates to borrowers, reflecting the risk-free rate set by government securities.

The cost of borrowing from commercial banks reached a new high in May, and average household loan interest rates remained elevated in March. However, consumer loan rates have not yet fully incorporated the recent increases in government borrowing rates and the Central Bank Rate (CBR). Analysts express concerns about potential declines in private sector credit growth as businesses and households face crowding out. Despite private sector credit growth remaining in double digits, it has slowed down from its peak in July last year.

Opinion: The rising government borrowing rates and subsequent increase in loan costs pose challenges to the private sector’s access to credit. Banks may adopt a more conservative approach, reducing lending to the private sector. The high yields on government securities may incentivize banks to invest more in the government rather than lending to households and businesses. This situation could lead to a further crowding out effect on the private sector. The World Bank has cautioned against the persistent dominance of the private sector by heavy domestic borrowing by the government, which hinders banks’ role in facilitating investments and economic activity. However, certain sectors, such as manufacturing, transport and communication, trade, and consumer durables, continue to demonstrate strong credit demand.


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