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Lending frenzy to peak after elections

Kenya rallied to register 7.5 percent economic growth in 2021 – higher than the 4 percent average recorded in sub-Saharan Africa. The World Bank has projected a moderation in 2022 and expects the middle-income economy to grow 5.2 percent.

By Steve Umidha

Demand for business loans is expected to peak in the last quarter of the year in what experts predict could commence immediately after next week’s general elections.

The lingering effects of Covid-19 pandemic and the war in Ukraine have made life difficult for ordinary Kenyans and small businesses, some of which have had to trim down their operations and workforces to accommodate those adjustments.

Rising oil prices has led to inflation – where too much money chases too few goods – with the inflation averaging 7.9 percent in June, according to the Kenya National Bureau of Statistics (KNBS) on the country’s year-on-year inflation rate.

Those challenges, according to Peter Macharia – an economic expert, could soon start to slacken after the August 9 polls – a key deterrent to economic growth.

“We are likely to see an improved business environment after the general elections despite the inflationary pressures whose impact have swamped several businesses in the last few months,” offered Macharia.

Adding that, “As a result, we believe most of the businesses that suffered during the year, could seek loans for business expansion after the elections,” opined the chief executive of Jijenge Credit ltd, in an interview predicting stability in the remaining part of the year, and a pick-up in economic activity after the polls, given the rising number of loan applications and credit growth that is often seen during the last three months of any given year.

The situation, according to economist XN Iraki, has especially affected the poor and their purchasing power.

“For instance, the price of maize flour, a staple in Kenyan households, rose from Sh150 to Sh200 between mid-May and June 2022. Yet, no salary or wage has gone up by 33 percent over a similar period to protect consumers’ purchasing power,” he noted in his recent assessment of the upcoming polls and its impact on the economy.

Political uncertainty tends to have a significant impact on economic conditions, such as the cost of inputs like work and resources as well as customer behavior.

But it can also threaten business continuity, which is the simple ability for firms to carry out their daily activities.

In an inflationary environment, like what is presently grasped in the country, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

The only headwind that could face commercial banks, according to lending patterns, is the expected rise in high interest rates, which, while may put pressure on lenders’ ability to grow their profits, will also coincide with the need by traders to pump in investments to upscale their business operations.

“Banks will be making up for the lost opportunities eaten by those factors which is already a sign of confidence in the Kenyan economy,” stated Macharia.

Ordinarily, the economy suffers if inflation becomes too high, but with controlled, lower inflation, employment increases and consumers have more money to buy goods and services, and the economy benefits and grows.

The Central Bank of Kenya (CBK) is expected to increase its base lending rate by a further 0.5 per cent to cushion the economy from roaring inflation, according to economists at ICEA Asset Management which made the predictions ahead of the regulator’s Monetary Policy Meeting (MPC).

While the move signals an even higher interest rate regime, barely three months after a similar review by the CBK monetary committee was done in May.

Such controls often include an upward review of a country’s base lending rate to cushion the country from economic corrosion even though such a move impacts traders.

The CBK – who is the country’s banking regulator, sets a base rate or base interest rate which it then charges to commercial banks for loans.

While commercial banks are free to set their own interest rates for borrowing, the rates they charge on loans and offer on savings tend to be derived from the base rate.

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