Tame cost of loans for fast economic recovery

The rising cost of loans for homes and businesses in a recovering economy is problematic. Data from the Central Bank of Kenya shows that the average lending rate rose to a 27-month high of 12.2 percent in April.

Pricey loans often prevent businesses from getting credit for expansion, which blocks job creation. Similarly, households shrink their borrowing for purchases, slowing down demand for goods and services, impacting companies’ bottom lines.

Due to increased government borrowing from the domestic market, the Treasury bill yields have risen by a percentage point since June last year.

Banks, competing for money with the State, have been forced to increase interests for large depositors in an attempt to have them leave their money with them instead of lending to the government. This additional cost is ultimately passed on to customers in the form of expensive loans.

Only a few ultra-rich firms and individuals with huge bank deposits are the beneficiaries of the competition between the lenders and the State.

Lower borrowing costs will likely boost the growth of private sector credit and renew demand for domestic loans.

Therefore, the government must relook its domestic borrowing since it hurts the majority, especially the private sector, risking more business failures and job losses. To begin with, it must cut its appetite for local debt so that banks can direct money to productive sectors of the economy.

One alternative is to go for long-dated loans from development financiers with terms of even up to 30 years and very low interest rates. Usually, government rolls over its debt stock with syndicated loans, which tend to be expensive.

With an ever-present risk in the market, especially after the pandemic, without a keen eye on public finances, and long-term planning, the high cost of borrowing can lead to painful defaults or vicious austerity.

We, therefore, hope that the government reconsiders its plans to borrow some Sh662 billion from the domestic market in the new fiscal year starting July 1.