By James Anyanzwa
Policymakers, bankers, researchers, scholars and other industry players are meeting in Nairobi this week.
They will discuss and come up with practical measures to address the prevailing high cost of credit in the country. The two-day event organised by the Kenya Bankers Association (KBA) seeks to come up with long-term solutions based on rigorous assessment of the market and the economic situation under which banking business is currently operating.
KBA’s first annual banking research conference themed, ‘Fostering Objectivity in Banking and Financial Services’ comes two years after the Central Bank concluded its first monetary policy forum at the Kenya School of Monetary Studies in Nairobi with a view of addressing the high interest rate regime.
Debate over interest rates has never shown signs of abating as key stakeholders haggle over diverse proposals of taming deposit rates. Key players in the banking industry cite high cost of collateral, poor infrastructure, a complicated land tenure system and a slow judicial process as some of the reasons for their high priced loan products.
Even though the Central Bank of Kenya ( CBK) Monetary Policy Committee (MPC) has frequently cut the bank’s prime lending rate (CBR) to spur household and business spending, majority of banks tend to ignore the signals, citing high cost of funds and the overall cost of doing business in the country. Last week, KBA blamed inefficiencies in the interbank market for the banks’ lukewarm response to CBK’s monetary policy. KBA Chief Executive Habil Olaka pointed out that commercial banks do not borrow from the CBK window to on-lend to customers but to settle daily obligations in the clearinghouse.
Olaka explained that most banks, however, borrow from each other to on-lend to customers and therefore the rates existing in the interbank market are true reflection of the ‘cost ‘ of funds.
“ Banks don’t borrow from CBK to on-lend. They borrow to square their positions at the clearinghouse. The cost of funds in the interbank market to a large extent determines the cost of funds in various banks,” Olaka told a media briefing in Nairobi last week.
Credit Reference Bureaus (CRBs) have lowered the costs of information search and risk assessment for banks’ existing and potential customers while establishment of cash centres in various towns have reduced the cost of transporting money. MPC, however, noted that interest rate spreads still remained high suggesting that these cost reductions had yet to be fully transferred to bank customers and the economy at large through declining cost of credit.
“If the interbank market is made efficient then there is no need for banks to go to CBK to borrow. But right now the market is not working effectively and optimally,” said KBA director of research and Policy Dr Jacob Oduor.