Kenya’s business landscape has witnessed its fair share of challenges, including high interest rates. When the government is focused on controlling inflation with high interest rates, small-scale businesses, which rely heavily on credit, bear the brunt.
With access to credit drying up, these businesses find it difficult to operate normally and experience growth. This has also seen commercial banks deem small-scale businesses risky to default; thus, most are unwilling to lend to this bracket.
High interest rates have also led to the rise in the cost of borrowing and consequently limiting the level of aggregate investment and consumption and the overall economic growth. This has affected growth and expansion plans as businesses have been forced to cut their expenses, or lay off workers.
In the 13 months leading up to June 2023, the country’s inflation rate remained above the Central Bank of Kenya’s target range of 2.5% to 7.5%, even rising to a five-year high of 9.6% in October last year.
The elevated inflationary pressures triggered the Monetary Policy Committee (MPC) to adjust the Central Bank Rate (CBR) upward by a cumulative 300 basis points to 10.5% as of August 2023, from 7% in March 2022. This is bad for the economy, and simply means that new loans cost more.
Just as banks will be paying more in interest to depositors, the adjusted charges are passed on to borrowers. Payments also go up on adjustable-rate loans. There is also a higher chance of a recession, and stock market volatility when rates are high.
The current environment, which has been worsened by the weakening of the shilling due to a structurally weak Kenyan economy, and the recovery of the US economy, are making the situation worse.
On a positive note though, this (tough) environment presents an attractive entry point for foreign investors looking to capitalize on the high yields available in the market, and weaker shilling, which may see their real return rise above what was anticipated in the long term.
The government should provide incentives and support programs to assist Kenyans and businesses, or many will have no choice but to close down, thus increasing the number of the unemployed.
