Kenya: Proposed Credit Relief Measures Could Lock Out New Borrowers From Accessing Credit - Genghis

Mar 23, 2020 | Capital FM

The proposed credit relief measure by the Central bank of Kenya may lead to banks holding back extending new credit, according to experts.

Analysts at Genghis Capital said the move could lead to adverse selection whereby riskier borrowers are locked out of access credit.

Additionally, the move could also lead to moral hazard, where borrowers expect further relief in the future.

On Wednesday, CBK announced a raft of measures that commercial banks should follow to cushion borrowers from the impact of the disease.

These include providing relief to borrowers on their personal loans and offering restructuring plans for SMEs and corporates

"We tend to agree with Dr. Patrick Njoroge's 'this is just the first step' remark. With no hard evidence yet of the economic knock, the CBK (and the banks) are trying to avoid a 'Type II' error; doing nothing in the face of a menacing lion," the analysts say.

At the same time, the analysts said a lack of policy coordination is the weakest link, citing experiences in the developed markets where shortfalls of uncoordinated policy response, more specifically, use of monetary policy solely as first responders to the economic hit.

"We think comprehensive coordination could address such risks. In addition, as the business environment becomes more challenging, we expect a dip in tax revenues and in turn government spending."

The analysts have recommended for there to be a further downward recalibration of the expected FY2019/20 Supplementary Budget II to factor in the potential dip in revenue, mainly shortfalls in Customs, Import Duty and VAT Imports... Read more on All Africa