Bank lending strengthens further

Annual credit growth to the private sector strengthened further in May, coming in at 8.7% – the fastest growth rate in 27 months. You have to go back to February 2016 – the last month the indicator was above 10% before dropping to historical lows over the next two years – for a more robust rate.

The central bank rate, which is intended to guide commercial bank lending rates by influencing their funding costs, is currently at its lowest level – 9% – since the Bank adopted its inflation targeting lite monetary policy in July 2011. The Bank’s current cautious expansionary monetary policy goes back to April 2016 and has been justified as necessary to stimulate economic growth through more lending to the private sector.

Yet, the Bank has itself lamented the limits of its own policy in the face of sticky low private sector credit growth. In its April monetary policy report, it laid the blame on supply-side factors: even with the cost of funds lower than in previous months, banks were still reluctant to lend because their appetite for risk had reduced, driven by an increase in nonperforming loans. Until these factors were dealt with, credit growth to the private sector was likely to remain low compared to previous years.

A recovery in the real estate sector, though, seems to be the biggest reason behind the increased lending to the private sector. After dropping to negative levels in January 2017 and staying there for the next 12 months, it recorded its first positive growth this February of 3.6% and has not looked back. It was 8.8% in May, up from 8.4% in April.

The sector has accounted for largest share of commercial bank loans since April 2012. Another testament to its crucial role can be found in the Bank’s April report which said a slump in the sector was responsible for the slow levels of economic growth in 2016.

May’s annual growth in credit to the private sector was largely due to an increase in personal loans and household loans which increased by 13.5% to Shs2.3 trillion from Shs2 trillion last May. Other significant contributions were agriculture loans which rose 22% to Shs1.5 trillion, and credit to the building, mortgage, construction and real estate sector which grew by 8.8% year-on-year to Shs2.5 trillion.

The value of total outstanding loans at the end of the month was Shs12.4 trillion, 0.7% higher than April’s Shs12.32 trillion.

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Good news for the economy as lending to real estate grows faster in April