Govt payments key to private sector credit growth, says top banker

What you need to know:

  • Without an improvement in the payment culture in the country therefore, he said, the growth in private sector credit is likely to remain low.
  • He said banks are unlikely to relax their credit standards under the prevailing conditions.
  • The Treasury has been grappling with a revenue collection shortfall to the tune of Sh84 billion for the first six months of the fiscal year.

Releasing government payments that are due to contractors, suppliers and SMEs is key to unlocking the slow credit growth in the economy, a senior bank executive says.

NIC Group #ticker:NIC chief executive officer John Gachora said yesterday that while the review of the rate cap is seen as a key catalyst in reviving lending to the private sector, payment of government dues will allow businesses to pick up activity, in turn spurring the demand for credit.

Without an improvement in the payment culture in the country therefore, he said, the growth in private sector credit is likely to remain low since banks are unlikely to relax their credit standards under the prevailing conditions.

“Until those government payments are made, these SMEs and other contractors are not able to make payments of their own debts. We can revive private credit growth by stimulating demand…by ensuring that there is movement of money, and the government needs to pay its debts for this to happen,” said Mr Gachora during the release of the lender’s full year financial results.

The Treasury has been grappling with a revenue collection shortfall to the tune of Sh84 billion for the first six months of the fiscal year, but the successful issuance of a Sh201 billion sovereign bond last month offers room for the government to accelerate payments owed to the suppliers and service providers.

The year-on-year growth in private sector credit has slowed down to 2.1 per cent by the end of February, with the decline setting in well before the rate cap law came into effect in September 2016.

According to Mr Gachora, any review of the rate cap is unlikely to be concluded before the end of the year, due to the huge interest by various parties in the issue.