* Government imposed commercial lending cap in September
* Economists say measure hurts smaller firms deemed riskier
* Credit grew 4.3 pct in year to Dec vs 17.8 pct a year ago
(Adds more comments on credit growth slowdown)
By Duncan Miriri
NAIROBI, Feb 3 Activity in Kenya's private
sector increased modestly in January as banks curtailed new
lending to firms after an interest rate cap was imposed last
September, a survey showed on Friday.
The Markit Stanbic Bank Kenya Purchasing Managers Index
(PMI) fell to 52.0 percent in January from 54.1 in December,
still above the 50.0 line that divides growth from contraction.
"Since the legislation to cap interest rates came into
effect ... we can now see signs of distress within the private
sector as ...(survey respondents) lament about cash shortages,"
said Jibran Qureishi, East Africa economist at Stanbic Bank.
The government capped the lending rate for commercial banks
at 400 basis points above the central bank rate, now at 10.0
percent, a measure economists said would hurt economic growth by
discouraging loans to smaller borrowers deemed more risky.
"A further slowdown in private sector credit growth and poor
weather conditions will most likely lead to a downward trend in
the PMI over the coming quarter," Qureishi said.
Private sector credit growth had already started falling at
the end of 2015 after the central bank toughened supervision. It
worsened from April when mid-sized lender Chase collapsed.
Year-on-year credit growth was 4.3 percent in December,
compared to 17.8 percent a year before, central bank said.
But the central bank said the drop in credit growth had
bottomed out, with growth hovering near the 4.3 percent level
for three months. Governor Patrick Njoroge forecast this week
the economy would grow by 5.7 percent in 2017.
Njoroge also said the impact of slower credit growth to
firms had been factored in that growth forecast, in part because
farming which accounts for a quarter of Kenya's $62 billion
gross domestic product (GDP) did not rely on credit.
"The areas where credit moves GDP much more is areas like
trade and credit in trade is growing," he said.
The government says the cap aimed to stop banks charging
excessive rates on smaller businesses, but economists say
smaller firms that are vital to create jobs cannot secure loans.
"It exerts a needless cost on the Kenyan economy, for very
little gain, and further complicates any poverty alleviation
effort," Razia Khan, head of Africa research at Standard
Chartered in London, told Reuters.
The International Monetary Fund said in a report on Jan. 25
that Kenya's economic outlook was positive but rate controls
were a drag. "It is essential to remove these controls, while
taking steps to prevent predatory lending and increase
competition and transparency of the banking sector," it said.
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(Editing by Edmund Blair)