Kenya’s Private Sector Credit Growth Remains Relatively Low

The private sector is a section of the economy that is not state-owned comprising private organizations and individual investors and is largely profit-oriented.

Private sector credit refers to the financial resources provided to the private sector by financial corporations for the development of the economy.

In Kenya, the major constituents of private sector lending include commercial banks, capital markets, Saccos, microfinance institutions, finance and leasing companies, pension funds, as well as insurance corporations.

Despite the Kenya financial sector being dominated by banking institutions which contribute 99.0% of the total lending, private sector credit growth has remained relatively low, averaging at 10.6 percent for the nine years under review.

As such, in comparison to developed economies, capital markets funding in Kenya at 1.0 percent is underdeveloped whereas the developed economies have bank and capital markets funding at 60.0 and 40.0 percent respectively.

There has been a significant rise in banks’ lending to the private sector over the years, with the total domestic credit extended to the private sector credit increasing at a 7-year CAGR of 6.5 percent to 3.1 trillion shillings in August 2022, from 2.1 trillion shillings in August 2015, in line with the relative economic growth averaging at 4.8 percent for the last 7 years.

Credit extended to the private sector as of August 2022 stands at 3.3 trillion shillings with the sector with the highest allocation being a credit to the trade sector at 504.4 billion shillings, equivalent to 15.2 percent of the total credit.

In terms of YTD growth, the mining and quarrying, as well as agriculture grew at 45.6% and 16.8% to Kshs 21.4 bn and 110.1 billion shillings respectively, from 10.9 billion shillings and 92.4 billion shillings respectively in January 2022.

The positive credit uptake shows the resilience of the two segments despite increased credit risk due to the deteriorated business environment following elevated inflationary pressures.

Private sector credit growth has been on an upward trajectory in 2022, reaching 12.5 percent in the 12 months to August 2022 compared to 7.0 percent in August 2021, attributable to increased credit demand despite elevated credit risk brought about by the electioneering period.

Credit growth was mainly driven by sectors such as Agriculture, Business Services, and Manufacturing at 19.2, 16.1, and 15.2 percent.