Banks set lending rate at double the CBK benchmark Share Bookmark Print Rating

The central Bank of Kenya. The monetary policy committee has reduced the CBR by 9.5 percentage points. FILE 

By GEORGE NGIGI
 

 

In Summary

• Nearly all the six big banks by market share have cut their minimum (base) lending rates to about 17pc compared to the CBR which has dropped to 8.5 pc.
• The lenders have defended their position, saying it reflected the true cost of lending to borrowers.

The latest round of interest rate cuts by commercial banks has left them at an average of double the Central Bank of Kenya’s benchmark rate, reflecting a wide disconnect between the policy maker and the lender’s perception of the cost of money in the economy.

Nearly all the six big banks by market share have cut their minimum (base) lending rates since the Monetary Policy Committee sitting early this month, converging at about 17 per cent compared to the Central Bank Rate (CBR) which has dropped to 8.5 per cent.

The banks’ laxity to reduce lending rates in line with the regulator’s signal has prompted criticism that the lenders charge exploitative interest rates on loans to drive their profits at the expense of their customers.

The lenders have however defended their position, saying it reflected the true cost of lending to borrowers.

“CBR is a policy rate that signals the direction; each move that the CBK makes the market interprets it but it does not have to be of the same margin,” said Habil Olaka, CEO of the industry lobby the Kenya Bankers Association.

The monetary policy committee has reduced the CBR by 9.5 percentage points from a high of 18 per cent at the end of 2011 a time when banks had placed their base rates at an average of about 25 per cent. This means the banks have cut their rates by an average of seven percentage points.

“This is double speak because there is usually a swift response when the rate is raised and consumers in the industry feel the regulator is failing to exert enough pressure,” said Stephen Mutoro, the CEO of lobby group Consumer Federation of Kenya.

The rate of inflation has remained below five per cent since the turn of the year and the cost of deposits has dropped, making the case for more aggressive rate cuts by banks.

The cost of lending to the government, which used by investors in bargaining for deposit rates, has been on the downward trend owing to too much liquidity in the market.

Last week the government had offered Treasury bills and bonds worth Sh20 billion for sale but was offered Sh61.4 billion by the public. The 91 day Treasury bill interest rate fell to 8.48 per cent from 9.37 per cent a week earlier.

The cost at which banks lend money to each other, commonly referred to as the inter-bank rate, has also been on the decline underlining increased cash circulation. Last week the inter-bank, which also contributes significantly banks’ interest expenses, was at an average of seven per cent. 

Commercial banks have been holding the lending rates high arguing that depositors are still demanding high returns for their cash.

The CBR rate is used to base the price at which the Central Bank lends to commercial banks through the overnight window.

 “There is no relationship between the CBR and banks’ base rate- when the CBR goes down it signals the banks should lower their rates. The movement is what is important,” said a former member of the MPC committee who did not wish to be named owing to his relation with CBK.

The banks’ persistence in holding the high interest rates has however seen credit uptake slow down and the volume of loan defaults rise, exposing them to higher loan loss provisions which affect their profits. Last year banks relied on the wider net interest margins to grow their profit levels.

In the first quarter of the year the banks lent out Sh40 billion compared to Sh50 billion loaned out in a similar period last year. Non-performing loans rose by Sh9 billion in the three months to March to Sh70 billion.

(Read: High interest rates leave banks with Sh70bn in bad loans)\

 

A survey by the CBK last month found that there was high liquidity in the market attributable to higher maturities of Treasury securities, foreign exchange inflows through the Nairobi Stock Exchange, sale of foreign exchange, and slow uptake of credit by the private sector.

 

With decreased loan uptake the banks have been increasing their stock of government securities which are lucrative owing to their risk free nature. As at end of last week commercial banks held Treasury bills and bonds of Sh528.1 billion up from Sh460.8 billion at the end of March.