Recent reductions in interest rates on bank loans signals a reluctant nudge in the right direction although it is evident that lenders have not been reducing them out of their own volition.
In the last three Monetary Policy Committee meetings, the Central Bank of Kenya (CBK) has been easing its base lending rate, the benchmark commercial banks use when determining how to price the cost of loans.
However, despite the reductions, banks continued to charge arbitrary rates until CBK, the industry regulator, threatened obstinate lenders with daily fines. Only then did they start dragging their feet, one reluctant bank after the other.
One of the challenges Kenya’s economy faces is the high cost of loans, which has made many businesses unsustainable. This is why there is a consistently high number of buildings and vehicles being auctioned on account of borrowers being unable to meet their obligations to lenders.
It beats logic, for instance, for a bank to charge interest rates at 21 per cent. There is hardly any legal business today that can afford to pay that steep price for loans considering that they have other overheads, such as rent and payroll obligations.
This partly explains where some businesses are either closing or moving to properties where rents are lower. Others are either trimming their staff or sending them home altogether as they struggle to make ends meet.
Looked at critically, it should not come as a surprise that many individuals, businesses, and companies are actually working for banks in the sense that they are in a rat race to meet their loan repayment obligations. However, rather than adjust their lending rates to align with CBK guidelines, banks have continued to operate like the merchants of Venice, without due regard for the challenges that borrowers are facing, and which largely arise from expensive loans.
In the end, lenders are also hurting themselves because they are now provisioning higher amounts for bad loans, while their portfolios of Non-Performing Loans (NPLs) continue to grow. Rather than confront the challenge rationally, they are making it expensive even for good borrowers through what they are now calling risk-based loan pricing.
An economy thrives when ideas are transformed into businesses and products. In economies like the US, Japan and some parts of Europe, the cost of borrowing is very low, at between one and four per cent. Is it a wonder then, that in these countries, entrepreneurs have a high appetite for risk, and, as a result, come up with more innovations and products that help their countries to grow their wealth and boost exports?
In Kenya, the opposite is largely true. Because banks enjoy high returns from investing in government bonds and Treasury bills, they see no need to indulge entrepreneurs and walk with them until their ideas become products that then help the country expand its Gross Domestic Product (GDP).
The result is that many worthwhile ideas remain latent because banks are allergic to lending to potential entrepreneurs. In some sectors, businesses are moving across the border where the operating environment, including the interest rates regime, are more friendly and predictable.
As a result of banks’ usurious tendencies, Kenya’s economy is failing to generate as much jobs as it should and ends up consigning qualified youths either out of gainful employment or into jobs that do not generate value for the economy. This translates to a mismatch between the resources Kenya uses to train such youth and the return on investment that it generates from their meagre incomes from low quality jobs.
Clearly, a rethink is needed at policy level now that it is evident that banks are unwilling to regulate themselves or to act in tandem with CBK rules. Their lame argument, as advanced by the Kenya Bankers Association — that their funds are tied up in low return instruments — fails to stand up to scrutiny, because they fail to pass on the benefits when the matrix is inverted.
Going forward, Central Bank must move beyond showing menacing teeth at offending banks to actually biting them. This will serve as a warning to other recalcitrant lenders. So far, the regulator has signaled this intention. However, it needs to go beyond this and fine banks that have demonstrated unwillingness to comply.
The third option, of course, is for borrowers to instigate a class action suit to compel all banks to operate within CBK guidelines.
PS: Since the writing of this article, Housing Finance announced it had reduced its base lending rate from 17.26 per cent to 16.26 per cent. We have also been informed that there is a tug-of-war in some banks between sales teams and risk managers, with the fore urging banks to disburse more loans and the latter warning that that would amount to throwing away money.
