BY DAVID WANJALA
For a whole year covering the entire period Dr Patrick Njoroge has been in office as Governor, Central Bank of Kenya (CBK), commercial banks never heeded strong advice by the new sheriff at CBK on the need to self-regulate in the interest rates regime.
They did not proactively embrace the new mechanisms the regulator was putting in place, including setting friendly reference rates, that were geared towards leveling the playing ground in the lending market and that would provide a win/win environment for both lender and the public.
Lending rates of each commercial bank, as published by the regulator early this year showed the lenders charged up to three times the reference rate set by the CBK
They adamantly defied calls by the industry lobby and regulator to lower interests on loans despite a relatively favourable fiscal environment marked by low Treasury bill rates.
But Dr Njoroge, probably believing more in the supposed philanthropic nature that exists in every human being kept promising the nation that commercial banks would finally come a round and lower rates. In the meantime, he pleaded, cautioned and even cajoled government against instituting control measures on banks in the interest rates regime.
“Given time,” he said when he appeared before a Parliamentary Committee in July, “the market will force banks to re-price their loans or lose their dominance. “Right now the banks are under a lot of pressure from the population, from you (MPs) and from us as the regulator. They have large margins but they will adjust or lose their positions,” he told the committee that was looking into the Central Bank of Kenya (Amendment) Bill 2015 that was later sent to President Uhuru Kenyatta for assent.
What the CBK Governor did not know is that for two decades, kenya’s commercial banks had not, even the direst of circumstances, put the interest of Kenyans first and the public, leave alone Parliament, was aware and therefore skeptical.
When the Kenya Bankers Association (KBA) came up with a MoU immediately Parliament passed the Bill and forwarded it for Presidential assent, it was too predictable. The MoU, among others, promised; to reduce interest rates; drop customer account closing charges to “allow customers to shop around and transfer accounts from one bank to another’; to allocate Sh30 billion to enhance financial access for SMEs, Sh10 billion of which to women and youth-owned micro enterprises at concessionary rates not exceeding 14.5% and; to use CRB framework and the product type and loan tenors to classify borrowers into broad categories of low, medium and high, to reward low-risk borrowers with lower interest rates.
The country had been there before with the banks, in fact, twice. But what let the cat out of the bag was when the MoU was structured to take effect from August 25, a day after the expiry of the 14 days within which President Kenyatta was required to act on the Bill. And to try and win the support of the public, banks began contacting customers who have loans with them and promised to reduce rates on their loans with effect from August 25.
It was blunt blackmail on the President. It was hoodwinking the CBK Governor. It was insulting to the intelligence not only of their clients, but the entire Kenyan public.
Having been around long enough, even serving as Minister for Finance in the last political regime, a tenure within which the banks successfully pulled the same stunt on the fight to control skyrocketing rates, the President knew better than to be fooled a second time.
“Since receiving this Bill, I have consulted widely and it is clear from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks. These frustrations are centred around the cost of credit and the applicable interest rates on their hard-earned deposits. I share these concerns.
“This is the third time the National Assembly is attempting to reduce interest rates to affordable levels. In the previous two instances, dialogue and promises of change prevailed and banks avoided the introduction of these caps. In those instances banks failed to live up to their promises and interest rates have continued to increase along with spreads between the deposit and lending rates,” the President said in a statement when he assented to the Bill.
Like the proverbial monkey for which all the trees in the forest became slippery on its day of reckoning, the door to self-regulation has been shut on the banks in a clear case of self-infliction. They dismissed Dr Njoroge who must have known it was never going to business as usual in the sector and as such longed to pre-empt the undesirable government hand in a free market.
They, albeit unknowingly, forced the President’s hand. “Despite having one of the most efficient and effective financial markets,” the President said, “Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers,” Uhuru said in the statement.
