MPC reduced the Central Bank Rate by 350 basis points to 13 percent from July’s rate of 16.5 per cent signalling a downward trend in interest rates citing tamed inflation now at 6.09 per cent for August, a stable exchange rate that settled between the Sh83.90 to Sh84.32 last month and fairly stable short term interest rates as major contributing factors to the rate reduction.
While the noble intentions has always been to prompt commercial banks to avail cheap credit to consumers, the monetary policy instrument has largely not achieved the objectives. Although the CBK Governor Prof Njuguna Ndung’u has constantly piled pressure on banks to lower lending rates, the response has been slow or subdued.
Commercial banks, in their quest for more profits, have largely refused to bring down interest rates, which currently averages 20.15 per cent, according to latest CBK data. They have remained adamant, arguing the tenor and cost of funds (deposits) do now allow them to respond swiftly to monetary policy signals.
“There is a mismatch between deposit tenor and loan tenor in Kenya. The deposit tenor in this country is short term,” said Richard Etemesi, chairman KBA and chief executive of the Standard Chartered Bank Kenya Ltd during central banks’ first monetary policy forum in Nairobi in August 2010.
“The signals that CBK provides affect the short term end of the market but the difficulties we face is that banks don’t have access to long term financing.” It is estimated that about 41 per cent of the total deposits in the banking industry are of the tenor between 1-5 years.
Banks argue that lowering long term lending rates in less than a year would attract losses since the funds they procured expensively are still tied in their books.
“These are contractual obligations we have with our depositors, we cannot break them,” said Dr James Mwangi, chief executive, Equity Bank group. “Most banks provide loans with tenors between one to five years and have no influence on long term funding beyond this,” said Etemesi. Olaka argues that the cost of deposits is market driven and banks don’t have control over them.