Most Kenyan businesses and households are struggling under expensive loans, according to the latest Moody’s Ratings Insights report.
The report published on Monday, September 15, has shed light on why loans in Kenya remain very costly, pointing to a mix of government overborrowing, shallow local financial markets, and persistent inflation.
Further, the report stated that borrowing costs for governments, banks, and non-financial companies in Kenya, alongside South Africa and Nigeria, have risen significantly over the last five years.
This has been fueled by policy weaknesses, limited sources of capital, and unfavorable market conditions.
“Debt costs for banks, non-financial companies, and sovereigns have increased in all three markets alongside higher policy rates during the past five years,” said Lucie Villa, Moody’s Senior Vice President.
Also Read: Moody’s Warns of Kenya’s Weak Revenue Performance Despite KRA’s Ksh2.5 Trillion Tax Collection
Overborrowing Crowds Out Businesses
Moody’s noted that the government has been overborrowing, consequently squeezing local financial markets and making it harder for private businesses to access affordable credit.
Moreover, the government’s reliance on domestic borrowing means banks prefer lending to the state, which is considered safer.
This leaves less money available for businesses and households at competitive rates.
Additionally, the report noted that overborrowing by the Kenyan government and shallow local markets have limited access to credit for businesses.
Consequently, the crowding-out effect has left many small and medium-sized enterprises struggling, as loan rates remain high.
Also Read: Why Global Agency Has Upgraded Kenya’s Credit Rating to ‘B’
Moody’s On Inflation and International Borrowing
At the same time, Kenya has battled inflationary pressures, which affect purchasing power and raise the cost of doing business.
Moody’s observed that persistent inflation in Sub-Saharan Africa, including Kenya, has restricted access to low-interest credit.
Also, higher policy rates introduced by the Central Bank of Kenya (CBK) to tackle inflation have additionally fueled borrowing costs, with banks passing these costs directly to borrowers.
The report warned that without stronger policy frameworks and deeper financial markets, Kenya will remain stuck in a cycle of expensive borrowing.
The report emphasized that financing costs will stay high in the near future, weighing heavily on growth and investment prospects.
“Financing costs will remain high across sectors in Sub-Saharan Africa. Countries have large funding needs for development, but structural weaknesses that will take time to address are keeping costs high and weighing on growth,” Moody’s said.
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