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Lending by Kenya’s
commercial banks rose steadily between April and June, almost doubling
the lending growth during the same period last year, but remained below
desirable levels, the central bank’s Monetary Policy Committee (MPC)
said on Monday.

East Africa’s
largest economy is struggling to bring commercial lending rates lower
to stimulate greater credit expansion while facing a key referendum on
a new constitution later this week. Investors see a ‘yes’ vote as
important for stability.

Separate data on
Monday showed Kenya’s inflation rate ticking up slightly to 3.6 per
cent in July from 3.5 per cent a month earlier owing to higher food and
beverage prices, but analysts said it was expected to steady.

Gross bank loans
increased by 30 billion shillings between April and June 2010 to 828
billion shillings, with more than a quarter taken on by the
manufacturing sector. Domestic credit grew by 26.6 per cent in the
first half of 2010.

“The growth of
credit to the private sector, though, was noted to be below what is
desirable for a high growth trajectory,” the MPC said in a written
statement.

Central bank
Governor Njuguna Ndung’u told a news conference that last week’s cut in
the bank’s benchmark lending rate (CBR) by 75 basis point to 6 per cent
was to stimulate credit growth amid benign inflation and worries about
the high level of commercial bank lending rates.

“Despite (the)
reduction in lending rates … there is scope for banks to lower rates.
We are quite concerned about this,” he said.

While the central
bank has made seven cuts totalling 3 per cent to its lending rate since
it began a cycle of easing in December 2008, commercial banks have been
slow to follow.

Latest central bank figures put the average commercial bank lending rate at 14.39 per cent in June.

Market inefficiency

Ndung’u said the
spread between commercial banks’ rates was increasing as deposit rates
fell more sharply than lending rates. “These spreads signal
inefficiency,” he said.

At 1310 GMT,
Kenya’s shilling traded at 80.15/25, up slightly on Friday’s closing
price of 80.30/40 amid growing optimism Wednesday’s referendum on a new
constitution would be peaceful after the final campaign rallies passed
off without trouble this weekend.

Stocks on the Nairobi Stock Exchange’s benchmark 20 share Index climbed 1.27 per cent to 4494.78 points.

A central bank
market survey showed 41 per cent of banks saw credit expansion of more
than 10 per cent by the end of 2010 and more than half of private firms
expected their demands for loans to rise by more than 10 per cent
during the same period, the MPC statement said.

The same study also
showed that Kenya’s private sector is more optimistic the economy will
expand by more than 5 per cent in 2010 against 2.6 per cent last year
thanks to a rebound in agriculture and manufacturing.

The poll in July
showed that 17 per cent of those polled saw gross domestic product
above 5 per cent, nearly double the 9 per cent of those surveyed in
May, the MPC said.

“We are getting out of the trough faster than we thought,” Ndung’u said in reference to economic growth.

Separately on
Monday, month-on-month food and non-alcoholic drinks prices rose 0.5
per cent while alcoholic beverages and tobacco costs were up 1.2 per
cent on June.

“There are
pressures both ways so it (inflation rate) could remain within a fairly
narrow range,” said Nairobi-based independent economist Robert Shaw.

Inflation has been
slowing across east Africa most of 2010, largely due to easing food
prices as a result of heavy rains and increased harvests.

The next rains in
Kenya, usually short in duration, are expected around November. “If
they are deficient, it could exert pressure on food prices,” Shaw said.