By Michael Mutava Mulei
To the keen observer, interest rates by the local banks have been creeping upwards stealthily. Sometimes, it has been difficult for some people to take note, not for lack of being keen, but because the shoe is not on their leg. The reaction is starkly different if the same question is put to an entrepreneur, a car buyer, or a new homeowner, especially if their financing model is credit-related.
Interest-rate increments portend higher costs for asset financing and mean that borrowers have to make do with a closer financial haircut in loan repayments. These are challenging times, and knowing how we got here can help us prepare for other credit crunches in the future.
To begin with, higher interest rates may not always be construed to mean that the economy is in the doldrums. Interest is a monetary tool used by the central bank to check or boost productivity, and in a more critical role, they are a much-needed mask to inflation. According to the Central Bank of Kenya, commercial lenders’ current average interest estimate is 13.31%. This is higher in the recent past but not the highest historically.
In 2017 and most of 2018, the average market rate was above 13%; hence, the tide is just coming home. To acknowledge upward motions in interest rates as normal does not necessarily endorse the pain it subjects borrowers to.
Current high interest rates are caused by several factors that inevitably will determine their future trajectory. First, coming out of a heavy spending election year, coupled with various supply-side shocks such as the hangovers of a severe drought, it was difficult to dodge the inflation bullet. Certain economists argue that fiscal policy is a better response to rampant inflation than monetary policy.
However, in Kenya, practice trumps theory because the eco-system of the government has been structured to impress the masses with pecuniary rewards counterintuitive to austere measures. This compels the government to act on the monetary side through higher interest rates as their hands seem tied to the fiscal space.
Secondly, the government has had an overbearing presence on the domestic debt market, much to the detriment of retail and small-scale borrowers. The current one-year bond by the government of Kenya has a 13.7% yield, whereas the average lending rate for June was 13.31%. The government has entrenched itself as a preferred borrower, paying a higher rate than the average borrower. High yield notwithstanding, government anywhere in the world is considered a safe bet compared to the hustle and bustle of dealing with retailers.
The picture becomes grim when considering the long-term debt market, where government bonds are fetching as high as 16%. Remember that the most expensive bank lends at 17%, according to the Central Bank. The government is thus willing to match the most expensive lender and sustain high borrowing costs. Claims that the government is curtailing its international borrowing only stoke the flames of extortion in the domestic debt market as local banks compete to lend to the government.
Finally, like other world economies, our economy is intertwined with the global economy and occasionally bears the brunt of happenings beyond its control. The turbulence of world politics has infiltrated into important product prices in the world, notably fuel and the cost of food. This has led to traces of imported inflation, causing savers to burn through savings to make ends meet. Still, on global trends, the United States took bold expansionary steps after the COVID-19 pandemic, cutting interest rates on several major occasions to assuage the hardships it occasioned.
While the intentions were noble, the ensuing inflation was uncontainable, and the Federal Reserve embarked on a series of rate hikes, culminating in a 22-year height increase in June 2023. When developing economies make unprecedented interest hikes, smaller economies experience capital flight, further jeopardizing the credit market.
There may be loopholes to manipulate prevailing interest rates unfairly, but largely, this is a market phenomenon whose observation is a reflection of aggregated behavior and sentiments. As a result, there could not be a better response to punitive interests than a behavioral change.
It is incumbent upon every consumer to better manage their proclivity to debt, and try to do only what they must. Big ticket items such as home ownership, car purchases, setting up a commercial appliances business, etc., should be creatively funded through frugal means if waiting is not an option. If high loan interest hurts you, you are the target of monetary intervention, and you have no choice but to execute a behavioral change or quite simply perish.
The writer is a research fellow