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Unless commercial banks curb their greed, Kenya’s economy will choke

Tuesday July 10 2012



Banks in this country are very greedy.  How else do you explain the fact that they are unwilling to bring interests rates down even after the Central Bank of Kenya recently brought down the Central Bank Rate by a significant margin?

I am not in the habit of cramming this column with statistics and figures. Statistics will make you sound clever and learned. But when your aim is to provoke informed debate and influence public policy, cramming too many numbers in a column like this can be counter-productive.

You end up crowding out the less numerically- inclined segments of society from participating in the conversation. I want to introduce just a few important pieces of statistics to substantiate my assertion that commercial banks in this country are greedy.

The first piece of statistic I wish to rely on is the Treasury Bill rate. Why is the movement of this rate important in this debate? Because this is the benchmark that all commercial banks use to price loans.

Allow me to explain. Literally, every week, the government is in the market borrowing money by issuing Treasury Bills. And, the biggest buyers of Treasury Bills are commercial banks. Put another way, commercial banks collect money from the public and then lend some of it to them at some profit margin.

Because lending to the government is risk-free, banks price the loans which they lend to businesses and members of the public off the Treasury Bill Rate.

Going by this logic, lending rates should always come down in tandem with the Treasury Bill Rate. And, how has this bill behaved? The rate has fallen from a peak of 21 per cent in January 2012 to below 11 per cent in June this year.

When the Treasury Bill Rate began the downward trend around March, commercial banks said they would not reduce lending rates because the inflation rate was still too high. High lending rates were a reflection of inflationary expectations, they pontificated.

Which brings me to the second piece of statistics I wish to rely on to maintain the argument that commercial banks in this country are greedy — the inflation rate. How has inflation behaved? It has fallen from a peak of 19.7 per cent in November 2011 to 10.5 in June this year.

When the inflation rate started falling several months ago, commercial banks argued that they would not reduce lending rates because the Monetary Policy Committee of the Central Bank of Kenya had not reduced the Central Bank Rate, also known as the signalling rate.

Just the other day, the Monetary Policy Committee lowered the Central Bank Rate from 18 per cent to 16.5 per cent, signalling to commercial banks to ease lending rates.

The response from the banks has been mute, to say the least.  Granted, some of the banks have responded by cutting base rates. You still don’t see strong   commitment to bringing lending rates down.

I know of several businessmen who have frozen new projects because of high lending rates. Our people are paying too much for loans. High lending rates are literally choking growth as evidenced by recent statistics, which show that the gross domestic product fell to 3.5 per cent in the first quarter of 2012 compared to 4.9 per cent in the same period last year.

Commercial banks will keep giving excuses and shifting positions. They argue that they took too many expensive deposits, which they have to clear from their books first.

Yet we all know that a substantial proportion of the deposit base of commercial banks in this country is composed of current accounts on which they do not pay interest.

The truth of the matter is that the average cost of funds is much lower than they tell us. We were told that the introduction of credit reference bureaus would make things better. It has not happened.