How fast will banks cut lending rates?

By Jackson Okoth

Pressure is mounting on commercial banks to cut their lending rates and provide the much-needed loans to cash-strapped households and businesses.

Last week, the Central Bank of Kenya (CBK) cut the base-lending rate to 16.5 per cent from 18 per cent in a new move to signal days of cheaper credit.

But whether banks will pick the signal with a proportional cut of their own lending rates remains to be seen.

CBK had held the CBR rate at 18 per cent for the last six months. With the latest move, opinion is divided with a section of analysts terming this move as inconsequential.

PineBridge Senior Investment Manager Edward Gitahi says only those retail banks with a huge network and therefore able to source more deposits cheaply, will react immediately to the signals CBK is sending at the moment.

“Those commercial banks sitting on expensive cash or costly longer term deposits will not drop their lending rates any time soon,” says Gitahi.

Echoing Gitahi’s sentiments, Reginald Kodzutu, an investment analyst with Amana Capital Ltd says the state of the economy does not warrant any CBR cuts at the moment.

“The shilling is still volatile and banks are unlikely to respond to movements in the CBR with proportional cuts,” Kodzutu says. “Instead, what they will be watching is movements in the discount window and the interbank market,” he says, adding that if the CBR goes any lower, this is likely to throw away the shilling.

“At the moment, the local unit is solely dependent on support from IMF reserves,” said Kodzutu.

Kenya will receive an additional Sh2.5 billion ($300 million) from the International Monetary Fund (IMF) as part of concessional loan aimed at stabilising the shilling.  The money will be released in three tranches starting October if the board approves the recommendations during a country review scheduled for September.

This Sh2.5 billion is part of the Sh6.7 billion IMF loaned to Kenya to bridge the external current account deficit that was to blame for the drastic weakening of the shilling against world major currencies last year.