Jackson okoth

All eyes on CBK as its Top Policy Organ Meets 

 

By Jackson Okoth 

COMMERCIAL banks are expected to come under renewed pressure to lower their lending rates as a key committee of the Central Bank of Kenya (CBK) meets today. To be keenly watched will be statements by Central Bank’s Monetary Policy Committee (MPC), as commercial banks continue to ignore its signals. “ We are unlikely to see a further reduction in the bank rate as Central Bank of Kenya waits for the banks to respond, said Edward Gitahi, Senior Investment Manager, AIG Investments. He adds that it may take a while longer for banks to lower lending rates because of a fall in demand for credit.”

 The economy has been sluggish and therefore it will take a while before banks respond to these money aggregates,’ said Gitahi. With the economy struggling to recover from last year’s near-zero growth, credit needed to boost consumer spending remains limited and expensive. 

 Previous attempts by Central Bank to encourage banks to ease lending rates have met a muted response from commercial banks. Since December last year, Central Bank Rate(CBR) has been lowered by 1.25 basis points from 9 per cent to stand at 7.75 per cent by 22nd July this year. This is the rate at which Central Bank charge on loans to commercial banks. 

It is usually set by the Monetary Policy Committee and signals CBK’s monetary policy stance. While average lending rates are between 14-18 per cent, commercial banks pay a paltry 1.67 per cent for savings and 5.09 per cent to depositors. “The margin between borrowing and lending rates is still wide because of the high credit risk,” said Dominic Kiarie, Managing Director, British American Asset Managers (BAAM). 

 He adds that banks have maintained high lending rates to accommodate the high credit risk in lending to individuals and business. However, this is expected to change as CBK licenses more credit reference bureaus, to assist commercial banks track down loan defaulters. “ Credit is still expensive with banks maintaining the high rates as insurance against potential loan defaults. The regulator has to do more to reduce this perceived risk,” explains Kiarie. The price of bank loans remains high even as drought and a crippling recession push up the cost of living. 

 Figures indicate that inflation rose to 18.4 per cent in August from 17.8 per cent in July, on the back of rising food and energy costs. With El Nino rains expected in October, the ongoing harvesting especially in the North Rift and other regions could be disrupted, worsening the food supply situation. But with commercial banks yet to ease the purse strings, it will be keen to watch how CBK uses its monetary instruments to obtain a response. 

 GLANCE BOX • 

With inflationary pressure and the global financial crisis, commercial banks have become more risk-averse based on the expectation that the economic outlook could deteriorate. 

 • Banks have been reluctant to revise their base lending rates downwards, in order to maintain their profit margin in a higher inflationary environment. 

 • Although there is growing frustration over reluctance by banks to lower lending rates, key players in the industry cite the cost of banking services and prevailing high credit risks as some of the reasons for not moving downwards. 

 Ends............