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.

An earlier disbursement of Sh4.2 billion had helped the country stabilise the exchange rate and reduce the overall cost of living. The last time the CBR hit the 16 per cent level was in November 2011.

During that time, CBK was on an aggressive credit squeeze that saw the shilling strengthen from lows of Sh107 to Sh98 to the dollar.

While CBK is being blamed for being slow and out of sync when intervening in the economy, there are those who see this differently and feel that CBK is making a strong statement.

“We see the MPC slash the CBR again if there is an aggressive reduction in the rate of inflation, perhaps below 10 per cent in the coming months,” says Gitahi.

In the last few months, there has been debate over whether there should be a cap on lending rates charged by commercial banks.

Thus, cutting the CBR is likely to increase pressure and put the spotlight on commercial banks to also lower their lending charges.

excess money

As at June 30, 2012 CBK had mopped up excess liquidity from the market to the tune of Sh300 billion.

What this means is that while the CBR is dropping once again, commercial banks lack funds to lend. It is no wonder, therefore, that many are on a deposit mobilisation campaign to source for cheaper deposits.

At the end of MPC’s deliberations last week, the CBK governor said the decision to lower the rate was informed by the decline in inflation levels in recent months, relative shilling stability and strong business confidence.

The CBK has maintained a tight monetary policy stance since December 2011 (CBR steady at 18 per cent) arguing that the grip on liquidity and high interest rates needed more time to rein in inflation by cooling off import demand.

The MPC noted that a recent stabilisation of the exchange rate band of Sh84.7-86.0 to the dollar and the successive drop in month on month inflation to 10.05 per cent since January had convinced it to start climbing down the policy ladder.

Only a day after cutting the CBR, Corporate player Barclays bank cut its base lending rates by 1.5 per cent, a trend that will most likely be followed by other corporate or retail banks.