By James Anyanzwa

Central Bank of Kenya is demanding an explanation from commercial banks why they don’t want to lower lending rates.

The regulator has asked the institutions to come clean on whether it is the cost of funds or default risks that determines how much interest they charge on loans.

Prof Njuguna Ndung’u, the CBK Governor, said while banks have been reaping huge profits they are not doing enough to promote the private sector.

"Banks are profitable. You must make profits in order to sustain yourself in business. But this should also be in tandem with the reducing of lending rates," Ndung’u said on Monday.

He said besides other external factors, the high default rate among borrowers could be blamed on the punitive interest rates.

"Banks should let us know what sustains lending rates, is it costs or risks? We would like to see how we reduce the costs of transactions and mitigate these risks," he said.

The Governor’s remarks come after the bank’s MONETARY POLICY COMMITTEE (MPC)’s four attempts to spur consumer and business spending and promote economic growth returned almost zero results. Banks have been reluctant to respond to the committee’s reduction of the Central Bank Rate (CBR) and cash reserve ratio.

In a span of eight months, MPC technocrats have cut CBR four times and reduced CRR twice to stimulate the economy, but lending rates have remained unaffected.

Last month, MPC cut the CBR, the rate at which banks borrow from the CBK as the lender of the last resort, by 25 basis points to a new low of 7.75 per cent from eight per cent, lowered the CRR, the proportion of total deposits that banks are required to keep with the CBK, to 4.5 per cent from five per cent and reviewed the tenor of repurchase agreements by lengthening it to seven days.

Ndung’u said the bank would establish mechanisms of raising deposit rates to promote savings and mobilise resources to help achieve objectives under the Vision 2030.

"We can’t save when our deposit rates are so low. I believe it is going to pay a lot to raise the savings rate and mobilise savings." He urged banks to promote the private sector. He was speaking during the launch of the Southern Credit Bank’s first MasterCard Debit card in Nairobi on Monday.

The facility would enable the bank’s new and existing customers complete purchases, make payments and get cash anywhere in the world where MasterCard is accepted.

Ndung’u said the facility would help deepen financial markets by facilitating faster and convenient payments.