Money Markets
Treasury secretary Henry Rotich with Solicitor-General Njee Muturi and
Debt Management director Felistus Kavisi when they announced the outcome
of Sh176 billion Eurobond issue at State House, Nairobi, last
Wednesday. EVANS HABIL
By CHARLES MWANIKI
In Summary
- Some analysts said the reduction of interest rates to single digit could be hindered by banks having a leeway to add a mark-up on the policy rate.
Expectations of a significant drop in interest rates
following the successful flotation of the Sh176 billion Eurobond may be
dashed by the premium commercial banks load on the reference price to be
set by the Central Bank from next week.
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Some analysts said the reduction of interest rates to single
digit could be hindered by banks having a leeway to add a mark-up on
the policy rate based on market realities such as the cost of money,
inflation, administrative costs and a borrower’s profile.
“The question is whether they will try to regulate
the premium as well. It may not be automatic that the rates will come
down,” said Standard Investment Bank head of research Francis Mwangi.
Treasury secretary Henry Rotich said on Wednesday
that the government hoped to bring down interest rates through a Kenya
Banks Reference Rate (KBRR) and full disclosure of bank charges through
the introduction of an Annual Percentage Rate (APR).
“I don’t see lending rates coming down any time
soon just because the sovereign bond has been floated. It did not happen
in Ghana and Zambia when they floated similar bonds. Lenders still have
to look at several factors, including risk, before deciding to lower
rates,” said an industry insider who requested not to be identified.
The KBRR, which will be computed as an average of
the Central Bank rate and the average 91-day Treasury Bill rate, will be
published by the CBK for the first time after the next Monetary Policy
Committee meeting on July 8. It will be effective for the next six
months.
The government is also counting on its reduced
appetite for local money to bring down Treasury Bill rates, which will
impact directly on the KBRR.
Whether this will be achieved remains to be seen,
with Sh191 billion in domestic borrowing having been factored in the
budget. Domestic borrowing targets were exceeded in the last financial
year and are on course to spill this year.
“Rates could even go up if the government is still
big in the domestic market,” said a commercial bank chief executive in
an interview.
Banks have in the past blamed the high cost of
money and operating costs for high interest rates, which observers see
as more driven by the commercial imperative.
“There has been a lot of money circulating in the
economy before the Eurobond, as shown by the CBK mopping actions and the
interbank rate, which is stable at around 6.8 per cent, yet we have not
seen an impact on the interest rates,” said Mr Mwangi.
Stricter control of lending rates could force banks
to scale down on longer term deposits from commercial entities, which
are deemed more expensive, and favour partnerships with development
finance institutions.
“The price control may limit banks’ ability to take
term deposits, and may only help banks with huge retail deposits,” said
ABC Capital corporate finance manager Johnson Nderi.
The Eurobond is seen as key in short term support
for the shilling before the money is disbursed to project funding,
giving CBK extra ammunition to contain any exchange rate fluctuations.
“CBK will also not be dipping into the open market
for dollars whenever there are dollar denominated bills to pay, making
holding of long dollar positions by market players unattractive. This
will ensure that the market will have higher dollar supply,” said Family
Bank treasury manager Joseph Gathege.
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