Borrowers Turn to Saccos for Cheaper Credit Amid Tight Monetary Policy

Borrowers in Kenya are increasingly turning to Savings and Credit Co-operatives (Saccos) for affordable credit. The shift comes as the Central Bank of Kenya (CBK) continues its efforts to stabilize the economy through tighter monetary policies and a stronger shilling. These measures, while stabilizing inflation, have constrained lending from commercial banks, forcing borrowers to seek alternative credit sources, particularly from Saccos.

This trend is evident in recent data which shows that private sector credit by Saccos increased to 11% in August 2024, up from 9.3% in the previous period. Consequently, Saccos’ share of credit to the private sector grew to 15.5% in August, compared to 15.1% in July. On the other hand, commercial banks experienced a reduction in their share of private sector credit, dropping from 84% to 83.6%. Microfinance institutions (MFIs), meanwhile, remained stagnant with a market share of 0.9%, as borrowers continued to favor the more affordable and accessible lending options offered by Saccos.

The surge in Sacco lending reflects the growing demand for credit amid tighter monetary policies and highlights the importance of alternative financial institutions in filling the credit gap left by commercial banks.

Monetary Policy Tightening and Its Impact

The tightening of monetary policy by the CBK has been a key factor behind the reduced lending by commercial banks. According to CBK Governor Dr. Kamau Thugge, the decline in credit growth can be attributed to the lagged effects of monetary policy adjustments and the appreciation of the Kenyan shilling. In his post-Monetary Policy Committee (MPC) briefing on Wednesday, Dr. Thugge explained that credit to the private sector by commercial banks declined to 1.3% in August 2024, a significant drop from 3.7% in July.

“If we adjust to the exchange rate effect, then credit to the private sector would have grown by 4.3% rather than 1.3%. But still, this is a deceleration in credit to the private sector even after taking into account the impact of the appreciation of the exchange rate on loans that were denominated in foreign currency,” said Dr. Thugge.

The CBK’s actions are part of broader efforts to stabilize the economy amid global economic uncertainties. The tightening of monetary policy is intended to manage inflation and maintain price stability, but the effects on private sector credit growth have been notable. The strong shilling has made it harder for borrowers with foreign currency-denominated loans, which account for around 26% of total loans, to service their debts, further contributing to the decline in credit growth.

The Role of Saccos in Kenya’s Credit Landscape

Saccos have long played a significant role in providing credit to individuals and small businesses in Kenya, especially in times when traditional banks tighten their lending criteria. These member-owned cooperatives offer loans at relatively lower interest rates and with more flexible repayment terms compared to commercial banks, making them an attractive option for borrowers during periods of economic uncertainty.

The recent increase in private sector credit by Saccos underscores their resilience and adaptability in meeting the credit needs of Kenyans, particularly those in the informal and semi-formal sectors. As commercial banks reduce lending, Saccos have stepped in to provide much-needed financial support to businesses and individuals seeking credit to meet their daily expenses, expand their operations, or invest in growth opportunities.

Moreover, Saccos are less reliant on foreign currency-denominated loans, which means they are less affected by exchange rate fluctuations. This makes them a more stable and reliable source of credit for borrowers who may be deterred by the risks associated with foreign currency loans.

Commercial Banks Struggling Amid NPL Increase

While Saccos have expanded their lending activities, commercial banks are facing challenges due to an increase in non-performing loans (NPLs). The CBK reported that the ratio of gross NPLs to gross loans stood at 16.7% in August 2024, up from 16.3% in June. The rise in NPLs has been observed across several sectors, including transport and communication, personal and household loans, trade, real estate, and manufacturing.

This increase in NPLs has put additional pressure on commercial banks, as they are required to make adequate provisions for these bad loans. Despite this, the CBK reassures that the banking sector remains stable, with strong liquidity and capital adequacy ratios. However, the rising NPLs signal a growing strain on borrowers’ ability to repay loans, which may further dampen credit growth in the banking sector.

Banks have responded to the increase in NPLs by tightening their lending criteria, making it harder for individuals and businesses to access loans. This has contributed to the shift towards Saccos, which are seen as more flexible and accessible.

Monetary Policy Eases as Inflation Declines

In response to declining inflation, the CBK has taken steps to ease monetary policy. During its most recent meeting on Tuesday, the MPC cut the benchmark interest rate by 75 basis points, bringing it down to 12% from 12.75%. This decision was driven by a significant drop in inflation, which fell to 3.6% in September 2024 from 4.4% in August.

The reduction in the benchmark interest rate is expected to provide some relief to borrowers and stimulate credit growth. However, the impact of this rate cut may take some time to be fully felt, particularly as commercial banks remain cautious due to the rising NPLs and ongoing economic uncertainties.

Challenges and Opportunities Ahead

While the easing of monetary policy and the expansion of Sacco lending offer some optimism, challenges remain. The continued increase in NPLs, particularly in key sectors such as transport, real estate, and manufacturing, is a cause for concern. Moreover, the decline in foreign currency-denominated loans due to the appreciation of the shilling presents additional risks to businesses that rely on these loans for their operations.

On the other hand, the growing role of Saccos in the credit landscape presents an opportunity for the financial sector to diversify and provide more inclusive financial services. Saccos are well-positioned to serve segments of the population that are underserved by commercial banks, particularly in rural and semi-urban areas. By leveraging their strong community ties and member-based structure, Saccos can continue to play a crucial role in supporting financial inclusion and economic growth in Kenya.

Conclusion

The shift in borrowing patterns, with more individuals and businesses turning to Saccos for affordable credit, reflects the broader challenges facing Kenya’s financial sector amid tight monetary policies. As commercial banks reduce lending due to the impact of monetary tightening and rising NPLs, Saccos have emerged as a critical alternative for borrowers seeking flexible and affordable credit.

While the recent rate cut by the CBK may provide some relief, the financial sector will need to navigate the ongoing challenges posed by exchange rate fluctuations, rising NPLs, and global economic uncertainties. In this evolving landscape, Saccos are likely to play an increasingly important role in meeting the credit needs of Kenyans, particularly as they continue to offer competitive rates and accessible lending options.