The Central Bank of Kenya (CBK) has projected that Kenya's real Gross Domestic Product (GDP) will expand by 5.2% with Monetary Policy focusing on achieving and maintaining low inflation. CBK reports that the Kenyan economy performed modestly in 2011 and realized growth in gross domestic product (GDP) of 4.4% compared with expansion of 5.8%  in 2010 and 2.7% in 2009.

The economic growth in the said period rode on Agriculture and Forestry, Electricity and Water Supply, Mining and Quarrying, Financial Intermediation, Wholesale and Retail Trade, Repairs, and Transport and Communication. In the first three months of 2012 the economy performed sluggishly registering real growth of 3.5%, or 140 basis points below 4.9% growth in the corresponding period in 2011.

Inflation

The twelve month inflation rate slowed down from 18.31% in January 2012 to 10.1% in June 2012 on account of reduced food inflation and fuel inflation in the year to June 2012 and prudent monetary policy stance. The rate has since dropped to 3.25% in October 2012. The annual average inflation, however, rose to 16.0% in June 2012 from 15.1% in January 2012 and 6.9% in June 2011.

The Central Bank says Monetary policy tightening started in March 2011 and was sustained through June 2012 to contain domestic inflation. Money supply (M3) growth decelerated to 15.5% from 19.3% in September 2011, and reserve money grew by 17.6% in the year to June 2012; against target growths of 18.7% and 14.2%, respectively.

According to CBK, The Central Bank Rate (CBR) continued to signal the direction of monetary policy. At the beginning of the fiscal year 2011/12, the MPC initially adopted a gradual approach by raising CBR by 75 basis points from 6.25% in July 2011 to 7.0% in September 2011. Persistent risk in inflation and exchange rate stability prompted the MPC to tighten further the CBR by 400 basis points to 11.0% in October 2011, followed by 550 basis points to 16.5% in November 2011 and further by 150 basis points to 18% in December 2011. The rate has since fallen to 11% in October 2012.

Lending rates

The average lending rates rose to 20.41% in June 2012 from 14.14% in July 2011 . Similarly the average deposit rate rose from 3.85%  in July 2011 to 7.88% in June 2012. CBK says the spread on commercial bank lending rates remained above 10 percent throughout the fiscal year reflecting risk perception by banks on the economy.

Banking sector growth

The report further says the Banking Sector recorded improved performance in the fiscal year 2011/12 with total assets increasing by 15.8% to KES 2,195 billion in June 2012 from KES 1,873.8 billion in June 2011 . The major components of the balance sheet were loans and advances, government securities and placements, which accounted for 56.6%, 19.5% and 7.3% of total assets, respectively.

Credit Reference

Deposits from customers, which accounted for 75.5% of total funding liabilities, increased by 21.4% to KES 1,667 billion in June 2012 mainly due to branch expansion, remittances and receipts from exports. Other developments in the banking sector include increased uptake of customer credit history by banks; additional approvals to banks to roll out the agency banking model; and the licensing of a deposit taking microfinance institution.

This enhanced financial services reach for many Kenyans with improved credit reports encouraging more commercial banks to lend to more borrowers.