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.
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.
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