By James Anyanzwa and John Njiraini

Commercial banks have spurned efforts by the Central Bank of Kenya (CBK’s) Monetary Policy Committee meant to lower the cost of credit. The move could effectively put the breaks on an ambitious plan by the Treasury to spur consumer and business spending and promote economic growth.

In a span of eight months, the Monetary Policy Committee (MPC) technocrats have cut the Central Bank Rate (CBR) — the rate at which banks borrow from the central bank as the lender of the last resort, four times and reduced the cash reserve ratio (CRR)- the proportion of total deposits banks are required to keep with the central bank, in order to stimulate the economy, but lending rates have remained unaffected.

In fact, commercial banks appear even more reluctant to heed these signals and have blatantly refused to pass on the benefits to consumers.

"These are positive moves that will help the market, but we have to see how they translate in the market," said Martin Oduor-Otieno, Chief Executive of Kenya Commercial Bank (KCB) and chairman of the Kenya Bankers Association (KBA).

Oduor says that one of the reasons why banks are reluctant to implement decisions by the MPC is because the market is still liquid enough and interest rates on fixed deposits are still healthy for them.

Despite its moves having little or no impact in the market, the MPC has still gone ahead to cut the rates prompting questions on what sort of research the technocrats seating on the committee undertake before arriving at any particular decision.

The MPC comprises eight members, four of them being employees of the Central Bank while the other four come from institutions of higher learning and the private sector and are obliged to commit at least 50 per cent of their time working for the MPC.

About a fortnight ago, the committee reduced CBR rates from eight to 7.75 per cent. In addition, the committee that convenes once in every two months lowered cash reserve ration requirements to 4.5 per cent from five per cent and reviewed the tenor of repurchase agreements (REPOS) by lengthening it to seven days.

Exorbitant rates

Ironically, these moves came after the committee raised concerns about activities of commercial banks, which it said had continued to lend at exorbitant rates in disregard of its previous decisions.

The committee, which consists of renowned economists and bankers, has also acknowledged that previous rate cuts are yet to improve efficiency in the financial sector.

CBK Governor Prof Njuguna Ndung’u, who chairs the committee, is on record contending that commercial bank lending rates have not declined and private sector lending fell off in the second quarter.

While such monetary policy actions have had almost immediate impacts in other countries, local consumers and business people are yet to benefit.

The unfolding scenario, which has seen big banks hoard cheaply procured funds has not augured well for the slowing economy, which desperately needs to be stimulated to gain the take-off thrust.

By cutting these rates, the MPC expects commercial banks to lend to the private sector at reduced interest rates, but because of the drag, the excess liquidity is finding its way into government treasury bills and bonds.

Some of this money has found its way to the inter-bank market as evidenced by the low inter-bank rates, which has been stooping to as low as three per cent in some days.

Financial Journal confirmed that most commercial banks are indeed sitting on a lot of cash. For instance, KCB has a liquidity ratio of 33 per cent above the minimum requirement of 20 per cent.

Industry insiders opine that government securities offer the best market for banks, especially those without diversified a portfolio.

"There are a lot of instruments to be brought in the market such as bonds. Banks are scrambling for these kind of instruments," said a CEO who did not want to be named.

Non-performing loans

Commercial banks have indicated that the idea of cutting lending rates was still far from reality owing to the prevailing economic situation that has come with rising number of non-performing loans (NPLs) and uncertainty over expected economic recovery.

While MPC’s latest actions were meant to increase the availability of funds in the banking system, making the cost of credit affordable to the private sector and helping boost the economy, commercial banks have expressed reservations about passing on the benefits to the consumers.

Richard Etemesi, Standard Chartered Bank Kenya (SCBK’s) chief executive, argues that lending rates are determined by many factors apart from the cost of liquidity or the availability of liquidity. He said banks are particularly concerned about the likelihood of defaults and their own cost of funds. "Hopefully there should be a knock on effect on deposit rates and hence lending rates," he told Financial Journal.

Etemesi says that while banks could be willing to respond to MPC overtures by making credit available, many businesses are reluctant to commit to borrowing because of the current economic and politic uncertainty. This has resulted in low demand for loans and cash advances.

"What is required is a concerted effort to stimulate demand, especially through government spending which in turn will create a need for financing from banks," he said.

According to Etemesi, the banking industry witnessed healthy demand for consumer and household credit a few years ago, due to vibrant economy and a positive outlook.

The post election crisis and the global economic crisis however reversed the trend making it difficult for many individuals and businesses to service their debt obligations.

But Etemesi contends the sector has sufficient capital to absorb the increases in non- performing loans, judging from past experiences when at one point they exceeded the 40-50 per cent threshold.

Most of the CEOs who spoke to FJ said they preferred investing the excess money in corporate bonds or government securities to help check the growing levels of loan defaulters.

"I don’t think these actions will lower lending rates. To us the rates are determined by the demand and supply of funds. The deposit rates have not come down," said another CEO who did not want to be named.

In refusing to pass on benefits to consumers, bankers argue that quality of their assets have deteriorated over the past year due to a number of factors. These include delayed VAT refunds by the Kenya Revenue Authority (KRA), inflationary pressures, increased competition for deposits and the post election violence that affected key sectors such as tourism, manufacturing, agriculture, transport.

"Our margins are getting squeezed because of competition. Therefore, lowering of interest rates may not happen across the board but selectively," said an industry player.