Banks blow hot and cold on rates

Even as pressure mounts on banks to reduce lending rates and kick-start the economy, a survey by the Central Bank’s Monetary Policy Committee (MPC) shows the majority may retain current rates. Some 53 per cent of the banks polled indicated rates would remain the same as last year.

The remaining 47 per cent say the rates will fall on the strength of demand emanating from the economic recovery increasing competition for lenders, lower inflation rates, high liquidity in the market and projected decline in Treasury bill rates.

But the banks betting on constant rates have an equally compelling case. According to the report seen by the Sunday Nation, a rising demand for credit, the high cost of funds and litigation, pressure from issuance of large volume bonds and the need for banks to recoup high operating costs incurred in 2009 will be key in keeping the high rates in place.

The survey polled 35 commercial banks, 15 of them large, 11 medium-sized and nine small. The CBK has over the past several months been putting pressure on banks to reduce their lending rates. However, an aversion to risk appears to have driven the banks reaction especially following sluggish economic growth last year.

Optimism is oozing out from medium sized banks on the issue of prime or actual rates falling with the majority of those polled forecasting a decline. Nevertheless, large and small banks maintain rates are likely to remain at last year’s end-year level. The base lending rates, normally the lowest rate banks charge their most trusted customers, in 2009 ended at around 15 per cent after rising one percentage point from mid-year level.

Despite varied opinion, there is consensus amongst companies that demand for credit this year is set to rise. The MPC polled 44 private sector players and financial institutions and found out that 66 per cent of them are vouching for increased credit uptake. That might be a good indicator to the banking sector of the kind of competition they are likely to face in the year.

Optimism is particularly high within the telecommunications sector which has grown to be the largest borrower in the country, with the likes of Telkom Kenya expected to be major players in the market. “Reasons quoted include expansion plans through new projects and likelihood of better borrowing terms due to better economic prospects for the country,” says the MPC report.

The views are largely informed by State growth projections. According to the findings, 91 per cent of the players in the private sector are guided by economic growth figures usually put out by the Kenya National Bureau of Statistics. Current projections for the starting year are at just over 4 per cent.

However, 58.6 per cent of the banking sectors’ growth projections range from 4.1 to 5 per cent. Like the other forecasters, this is informed by improved food production following good short rains, an upturn in the global economy, recovery in tourism, improved road infrastructure, lower power costs, improved political atmosphere and the roll-out of the State stimulus package.

Projection by the other 41.4 per cent is lower at between 3 and 4 per cent, citing insufficient rainfall and relatively poor political climate. There is more agreement on the inflation level after the short rains. 86 per cent of the banks believe it will either remain constant or lower. But the remainder believes the damage wrought by floods and rising crude oil prices driven by the international recovery will put the brakes on growth.

Currency speculators are likely to take note also. Some 70 per cent expect the Kenya shilling to appreciate as tourism booms, remittances pick, the economy recovers and transit visitors to South Africa pour in. Others believe the recovery of the US economy will have the opposite effect of strengthening the US dollar against the Kenya shilling.