Kenyan commercial banks have in recent years come under pressure to lower their lending rates. In recent weeks, the cost of credit has soared following a surge in the Treasury bill rates to above 22 per cent levels in October 2015.
The high rates have only served to hurt both, the economy and the borrowers. The lenders, which have perpetually come under heavy criticism for keeping interest rates high and profiting from such practice, stand accused of raising rates as soon as the Central Bank of Kenya (CBK) revises its rates upwards. Banks often take an eternity to lower lending rates despite intense pressure and criticism from all and sundry.
On November 12, the CBK governor Dr. Patrick Njoroge ordered commercial banks to lower lending rates. When he appeared before the National Assembly’s Finance Committee, Dr. Njoroge said that the banks’ regulator had given commercial lenders a warning to rescind the notices they had issued to their borrowers on rate hikes.
“We have been in touch with commercial banks and they understand that interest rates have gone down. They know our objective of executing a soft landing for rates and they have indicated they will be communicating to their borrowers that they will lower rates,” Dr. Njoroge said when he appeared before the parliamentary committee.
On October 19, 2015, Standard Chartered Bank sent out notices to its customers that it would raise lending rates from 17.5 per cent to 27 per cent. The new rate became effective on November 9, 2015 putting a dent to borrowing.
It is common knowledge that high interest rates have a negative effect, not just on households but also on the economy as many people either desist from taking credit or may fail to repay their loans. According to Sterling Capital analysts, high interest rates have already begun to negatively affect consumers and overall, will have a depressing impact on the economy. The usual effect is that the high rates will discourage new uptake of credit and lead to a surge in non-performing loans. “We note that a high-interest rate environment will affect economic output by reducing credit-sensitive consumption,” said Maureen Kirigua, an analyst at Sterling Capital.
Commercial banks have blamed a surge in the Treasury bill rates and the raising of the Central Bank Rate (CBR) to the upward adjustment in the cost of credit.
This year, the Kenya shilling has come under intense pressure due to structural weaknesses experienced in the economy – weak or dwindling exports when compared to imports, declining inflows from tourism- one of Kenya’s key source markets, and a widening current account deficit.
This year alone, the shilling has weakened by at least 15 per cent to the US dollar, from a level of 91-units to the dollar early in the year, to a nearly historical low of 107-units to the dollar mid this year.
The CBK moved with speed to save the currency from sustained weakening by raising its policy rate by a cumulative three percentage points within two months between June and July 2015 to 11.5 per cent. It also made an upward review to the Kenya Bankers Reference Rate (KBRR) – the base rate all commercial banks charge their customers minus other costs – from 8.57 per cent to 9.87 per cent.
Whereas the government was keen on saving Kenya’s exchange rate, the measures it took have had a devastating effect on borrowers with the hiking of rates by commercial banks, reminiscent to that of 2011.
In recent months, the state’s huge appetite for borrowing from the domestic market pushed up the cost of loans on the short term Treasury bills to over 22 per cent. In the financial year 2015/16, the government is targeting to borrow KSh219 billion. The state has already borrowed at least KSh63.6 billion from the domestic market. With the increased appetite for borrowing in the domestic market, liquidity challenges have been experienced with investors now bidding higher. This in turn has seen commercial banks slap their customers with exorbitant lending rates.
However, in the week that ended November 13, 2015, the yield on the 91-day Treasury bill declined to 9.654 per cent from 13.763 per cent a week before from a high of 22.133 per cent witnessed on October 19. The rate has declined consistently since then to 19 per cent at the start of November and 13 per cent in the week ending November 6, 2015.
On November 16, 2015, Equity Bank was the first one to reverse a decision it had made in October to increase its lending rate from 17 per cent to 24 per cent. Following the decision, its chief executive officer, James Mwangi said the decision was based on the rapid decline in T-bill rates. “The rise in interest rates was a short-term measure but it has been shorter than we had anticipated and hence the withdrawal of interest rates increase notice,” Mwangi told a news conference on November 16.
According to Bloomberg, the CBK is now keen to improve interest rate transmission to the market by compelling banks to keep rates low. Under the existing loan pricing framework, lenders rely on KBRR, which is computed as an average of the CBR and the two-month weighted moving average of the 91-day Treasury bill rate. Banks then add a premium ‘K’ depending on customer risk profile. KBRR is revised every six months meaning lenders and borrowers face a lag time before the effects of rate revisions are felt.
Equally, banks are required to issue a one-month notice to their customers prior to revising rates. However, it is still not clear how soon after should banks announce interest rate cuts when T-bill rates or the CBR decline. Needless to say, despite the banks remaining elusive on their commitment to lower lending rates, the clamour for an era of affordable interest rates will never stop.
“We are of the view that rates will take time to adjust as the KBRR formula has not been reviewed and is still inefficient in transmitting changes in the interest rate environment. Currently, KBRR is only revised every six months and banks are still compensating for the lag- time faced during 3Q15 interest rate hikes,” analysts at Standard Investment Bank said.
On November 17, 2015, the CBK retained its policy rate at 11.5 per cent for the fourth consecutive session since June 2015.
The Monetary Policy Committee, which is the CBK’s rate setting arm, noted that liquidity conditions had improved in November and this had occasioned a fall in interbank interest rates from 25.79 per cent at its last meeting in October to 10.53 per cent as of November 16.
By Joshua Masinde
Photo Credit: businessdailyafrica