Kenyan banks hard pressed to lower lending rates

JAMES MULIRO

Kenyan banks are under pressure to lower the cost of credit after recently hiking lending rates to the detriment of borrowers and the economy. The lenders, who have perpetually come under heavy criticism for keeping interest rates high and profiting from such also stand accused of raising the rates as soon as the Central Bank of Kenya revises its rates upwards. They 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 notice to rescind the notices they had issued to their borrowers on rate hikes.

He said the regulator had been “in touch with commercial banks” with the view of having them communicate “to their borrowers indicating that they will lower their rates or at minimum, withdraw the notices issued for higher rates recently”.

On October 19, 2015, Standard Chartered Bank made a painful announcement to its customers. The bank sent out notices that it would raise lending rates from 17.5 to 27 per cent. The new rate became effective on November 9, 2015 putting a dent to borrowers who were affected by the new rate.

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.

“Due to the prevailing challenging economic conditions and subsequent tightening of the monetary policy by the Central Bank of Kenya, it has become necessary for Standard Chartered Bank Kenya Limited to review its current pricing mechanism on our Kenya Shilling credit facilities,” the bank told its borrowers through an e-mail.

A lot of people continue to censure banks for choking economic growth by keeping lending rates high instead of lowering them to a reasonable level to create a win-win situation with borrowers.

According to Sterling Capital analyst, Maureen Kirigua, 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 high interest rate environment will affect economic output by reducing credit sensitive consumption,” Kirigua said.

Commercial banks have blamed a surge in the Treasury bill rates and the raising of the Central Bank rate to the upward adjustment in the cost of credit. The story did not just start from nowhere.

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 had weakened by at least 15% to the US dollar. From a level of 91-units to the dollar early in the year, the shilling had weakened to nearly its 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 3 percentage points within two months between June and July 2015 to 11.5%. 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% to 9.87%.

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 of the year 2011.

However, in the week that ended November 13, 2015, the yield on the 91-day Treasury bill declined to 9.654% from 13.763% a week before from a high of 22.133% witnessed on October 19.

The rate has declined consistently since then to 19% at the start of November and then 13% in the week ending November 6, 2015.

Since rates started going up in April this year, the rates for both Treasury bills (91 and 182) were the lowest recorded since the month of August as at the end of November 13. Notably, oversubscription for the 182-day and 364-day bills stood at impressive levels of 279.5% and 286.49% respectively when the rates went up.

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 Central Bank Rate (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 rates revisions are felt.

Equally, banks are required to issue a one-month notice to their customers prior to revising rates for borrowers. However, it is still not clear how soon banks should 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 the era of affordable interest rate regime will never stop.

“In our view, CBK may opt to increase frequency of KBRR revision to enable near immediate transmission of its rate decisions,” analysts at Standard Investment Bank observe.