Central banks in East Africa have been cutting interest rates to encourage businesses to borrow, but the strategy is not working.
Companies are holding back from approaching a bank for a loan, amid concerns about the dramatic slowdown in economic activity across the region, caused by restrictions aimed at containing the Covid-19 pandemic.
The banking sector in East Africa has seen demand for credit by the private sector fall since the onset of the health crisis.
Measures like closing borders, banning buses and cars, as well as overnight curfews, have hit business activity by limiting spending by consumers.
Central banks have cut interest rates, to make borrowing cheaper, hoping to encourage people to buy various goods, as well as convince entrepreneurs to take out a loan, to make investments that would boost the economy.
Kenya and Uganda have reduced their benchmark rates to 7% and Rwanda’s central bank has pushed its key lending rate down to 4.5%.
However, between March and April, the value of loans issued by banks in Uganda fell more than two thirds to $132,000.
In Kenya banks have been very cautious about lending, after a rise of 11% in the value of non-performing loans. This is lending by banks to customers who are not making repayments.
East Africa’s banks are sitting on cash and their usually profitable business of issuing loans has stalled.
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