Central bank attempts to revive loan demand amid virus pandemic

The Central Bank of Kenya (CBK) on Wednesday made another cut to its benchmark rate in a bid to prop up an economy battered by the coronavirus pandemic. The benchmark rate has dropped to 7%, the lowest in nearly a decade, from 7.25% in March. The central bank has cut its benchmark rate several times this year.

A reduction in central bank’s benchmark is supposed to lower the cost of borrowing, which should in turn boost demand for bank loans and unleash more money into the economy.

The government has locked down parts of the country and banned gathering as measures to curb the spread of the potentially deadly Covid-19. But the measures have left businesses facing shrinking sales and soaring costs, resulting in a slowdown economic activity in the country.

For commercial banks, the economic slowdown has meant diminishing demand for new loans. Providing loans makes up the bulk of business for big banks like Kenya Commercial Bank (KCB), Co-operative Bank (COOP) and Equity Bank (EQTY). Therefore, central bank’s bid to revive loan demand with benchmark rate cut bodes well for these lenders.

Equity shares jumped 2.31% on Thursday to close at Ksh37.65. KCB shares rose 1.93% to close at Ksh37 and Co-operative Bank shares gained 1.20% to close at Ksh12.60.