We'll push banks to lower rates, says CBK governor

What you need to know:

  • The rate was raised last year from 8.5 per cent to 10 per cent in June and up to 11.5 per cent in July 2015.

  • CBK has kept the rate at the elevated levels as it sought to support the shilling from the volatility that saw it fall to 106.1 against the dollar in September last year.

  • Kenya Bankers Association CEO Habil Olaka said that it is just a matter of time before banks are forced to lower their lending rates.

  • The market still seems hesitant to adjust rates with banks claiming that they have to factor in non-performing loans which have grown.

Lenders have no excuses to keep loans expensive after the Central Bank of Kenya (CBK) slashed interest rates for the first time in a year, the Nation can report.

The CBK cut the Central Bank Rate (CBR) by one per cent.

“On average, interest rates have remained high with no sign of direct reduction or very gradual decline. We will continue to push banks to lower commercial rates and we see the CBR as a very strong signal to lower rates,” CBK Governor Patrick Njoroge said.

The rate was raised last year from 8.5 per cent to 10 per cent in June and up to 11.5 per cent in July 2015.

CBK has kept the rate at the elevated levels as it sought to support the shilling from the volatility that saw it fall to 106.1 against the dollar in September last year.

The monetary policy, however, had ripple effect on the price of loans, which grew to reflect the tightening of liquidity and the reduction of money supply in the economy.

Banks were quick to point out that the macroeconomic situation had forced them to raise rates.

Kenya Bankers Association CEO Habil Olaka said that it is just a matter of time before banks are forced to lower their lending rates.

“The signal is quite clear, the direction is downward, depending on how quickly the market will factor in the rate, we will see rates going down,” he said.

Mr Olaka said that when wholesale depositors who determine the cost of money go to banks, they will be offered lower rates, triggering the cost of borrowing to come down.

“Individual banks may even decide to take the initiative as soon as possible to capture market share because this is a very competitive economy and they know the rates will eventually come down,” he said.

But the market still seems hesitant to adjust rates with banks claiming that they have to factor in non-performing loans which have grown.

POOR LENDING

Bad loans currently at Sh176 billion stand at 8 per cent of all loans issued by banks up from 6.1 per cent in December and 4.6 per cent in June last year.

Banks seem to want to punish good borrowers to cover for the bad loans, most of which the CBK governor attributes to poor lending practices.

The lenders have also often complained about the cost of money, which they say makes it difficult for them to lower rates. This is despite the fact that the rate at which banks lend to each other is as low as 3 per cent.

The governor, however, revealed that an elite group of about eight banks were rigging the interbank market to maintain monopoly.

“About eight banks holding around 80 per cent of the deposits are lending to each other at very low rates, but not everyone is in that club, the rest are getting very high rates,” he said.

Banks have for the last nine months come up with all manner of excuses to keep lending rates elevated even as conditions favoured a decline.

Around September 2015, T Bill rates for the 91, 182 and 364-day papers hit a high of 22.5 per cent, 22.3 per cent and 22.4 per cent respectively.

Banks argued that since T Bill rates represented risk free lending, they could not offer consumer loans below government paper. They went ahead and spiked rates to highs of well over 20 per cent.

The move, however, backfired on them after the government opted for a syndicated loan in October, a factor that reversed the rise of the T Bill rates.

The rates fell significantly and have maintained a muted outlook with the latest data showing that the three months government paper is being offered at 7.7 per cent.