Cheaper loans to boost Kenyan economy

Loans just got cheaper, thanks to a race by commercial banks to cut their lending rates.

From Monday, individuals and businesses will be able to get credit at a fairly cheaper cost, when the rate cuts by various banks take effect.

This is expected to accelerate economic recovery as increased uptake of loans is likely to stimulate economic activities. Lower rates will also calm inflation nerves, translating to a reduced cost of living, easing pressure on household budgets.

So far, at least four commercial banks have slashed their rates by between one and five percentage points, pushed down by efforts by Central Bank of Kenya (CBK) and falling returns from government securities like Treasury bills and bonds.

On Wednesday, Kenya Commercial Bank and NIC Bank became the latest to trim their base rates – the interest banks charge their good customers — even though their effective date will be June 1, 2010.

KCB’s rate fell from 15 per cent to 13.5 per cent, while NIC Bank cut its rate by 100 basis points to 14.5 per cent. Being the biggest bank in terms of branch network, KCB’s climb-down sends a strong signal to the industry.

KCB group chief executive Martin Oduor-Otieno said the move was in line with “market dynamics” aimed at encouraging borrowing to boost economic development.

The cuts come after months of cajoling by Central Bank of Kenya, which had for a full year unsuccessfully used its benchmark Central Bank Rate, or CBR, to have banks lower base rates.

“CBK views the expansion of credit to key sectors as closely linked to their growth and the economy’s growth path will be better served by a lower cost of credit,” said Central Bank governor Njuguna Ndung’u.

Barclays Bank of Kenya, the most profitable bank in the country, was the first to reduce its rate by 2 percentage points from 15.75 per cent to 13.75 per cent effective May 1, 2010.

Soon after, Cooperative Bank of Kenya announced that it would be cutting its rate by 1 percentage point to 14 per cent effective May. However, it will be lending to co-operative societies, which are some of its key clients, at 13 per cent per annum.

But it is Citibank that shook the market with its Tuesday rate cut by 4.75 percentage points to 10 per cent, so far the lowest in a market. But the bank, which exclusively deals with corporate clients, did not say when the new rate would take effect.

Analysts say the trend, which has piled pressure on the remaining banks to follow suit, will mostly benefit corporate and high-net borrowers with a good credit record. It also applies to fresh loans or refinancing.