Growth of banks slows down due to high interest rates

Growth of banksThe growth of the financial sector slowed down in the third quarter of the year as compared to the same period last year as high interest rates retarded the intake of new loans and cut the bank’s profit margins.

Data provided by the Kenya National Bureau of Statistics (KNBS) reveals that the financial sector went up by 6.8 per cent between June and September compared to a 7.6 per cent growth in the same period last year. This showed an improvement from the 6.4 per cent growth recorded during the second quarter and 3.6 per cent in the first three months of the year. The sector overcame the hindrance of high interest rates to achieve a very impressive growth during the quarter.

The quarter saw domestic credit increase by 4.5 per cent from KSh.1.55 trillion in June to KSh.1.66 trillion in September. The Central Bank eased its tough monetary policy stance that it adopted during the second half of the last year during the quarter leading to a slight drop in interest rates.

Johnson Nderi, head of research at Suntra Investment Bank said that last year there was a momentum and some deals had already been concluded before interest rates rose, but this year started with high rates and hence fewer positive decisions.

However, the profits of the banking sector before tax for the third quarter was 3.2 per cent lower than that of the second quarter, which could be due to lower interest margin due to the drop in interest rates.

The industry showed a profit before tax of KSh. 80.8 billion for the nine months till September which rose from KSh. 53.2 billion posted in June. The banking industry was heavily criticised for recording high profits at the cost of other segments, which had been weighed down by financing costs.

The finance sector achieved growth at a faster rate than the rest of the economy which went up by 4.7 per cent during the quarter mainly due to strong performance of the agriculture, manufacturing, electricity and water sectors.

The finance sector was third after electricity and water which grew by 13.7 per cent and agriculture which grew by 6.9 per cent. Both sectors were helped by the improved rainfall which ensured cheaper hydro-electricity generation and farming.

Construction went up by 0.6 per cent in the quarter compared to 3.6 per cent in the same period last year.

The Central Bank of Kenya cut the volume of cash in circulation, in the second half of last year, to support the shilling and control the cost of living which was rising due to increasing interest rates.

The Central Bank rate, which is now at 11 per cent, rose from seven per cent in September to top at 18 per cent in December where it held until June. The average lending rate is now 18.6 per cent with cost of long-term deposits averaging at 6.7 per cent while the 91-day Treasury bill offers a return rate of 8.14 per cent.

Image courtesy: FreeDigitalPhotos.net

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