BY JOHN OYUKE
A major restructuring in the banking industry is in the offing to reduce heavy reliance by players on high interest rate spreads to prop up huge profits.
Treasury has hinted that it is coming up with regulations that will make players in the banking sector more competitive and to ensure their actions support the economy.
Commercial banks have been recording huge profit margins in a high interest rate regime, even though depositors have been left dry.
Speaking after KCB announced a pre-tax profit of Sh5.7billion for the first half of 2011, a 36 per cent increase over the same period in 2010, Group Chief Executive, Martin Oduor-Otieno, attributed the strong showing to growth in income from various business segments.
“We witnessed increased growth in lending in retail, mortgage and corporate segments,” Oduor-Otieno said.
“We were able to realise a 35 per cent growth in net loans and advances from Sh130 billion to Sh175 billion, while deposits grew by 12 per cent to reach Sh216 billion from Sh192 billion over the same period,” he said.
But even against this good performance that has been replicated across the sector, banks have been hesitant or slow to cut lending rates despite repeated signals from the Central Bank of Kenya (CBK) on the direction the rates ought to take in the market.
For instance, weeks after the Central Bank’s monetary policy committee cut its base-lending rate from 18 to 16.5 per cent, only a few small banks announced a reduction, though minimal.
Raft of measures
Because of what has been termed as corporate insensitivity, Treasury PS Joseph Kinyua has disclosed that Government will now be implementing a raft of measures to deal with these concerns.
He said reforms to be undertaken as part of the next medium term plan for Vision 2030, the country’s economic growth blueprint, would seek to address the structural factors that continue to inhibit the degree of competitiveness the government would like to see in the industry.
“While the government remains committed to free market economic philosophy, we are, however, concerned about the high spread between the lending rates and deposit rates, normally referred to as interest rate spread,” Kinyua told Business Weekly late last month.
He said currently, the spread – interest charged by banks on loans to customers, minus interest paid on savings deposits – stands at 10 per cent.
This is far out of line from the kind of spreads in other parts of the world with high competitive banking market.
According to the 2011 CBK Bank Supervision report, the interest rate spread widened to 13 per cent at the end of December 2011 from 10.3 per cent by December 2010.
This was after the average lending rate for the banks increased from 13 per cent to 20 per cent in the same period.
The Government’s latest move comes hot on the heels of recent attempts by Parliament to introduce amendments to the Finance Bill 2011 seeking to cap bank lending rates at four percentage points above the Central Bank Rate (CBR) and deposit rates at a minimum of 70 per cent of the CBR.
Tabling the amendments, Gem MP Jakoyo Midiwo and a section of MPs accused banks of orchestrating the weakening of the shilling through the forex market and charging high interest rates on borrowed loans, with a mismatch on interest paid on customer deposits.
Despite this fury, banks have remained largely unmoved as they salt away huge profits even when the entire economy is slowing. The banks’ hard line stance on lowering the cost of credit and slow response to signals from CBK was recently a subject of heated debate with market observers calling for sterner action on the deposit takers.
Speaking during the monetary policy forum last month, Chris Kirubi, a Kenyan entrepreneur suggested that banks should be forced to bring down interest rates if they don’t do it willingly.
Exploitative mentality
“Right now, our banks are still stuck in the mentality of exploiting people,” he said during the event which brought together bankers, manufacturers, treasury officials, private sector and financial sector players.
CBK acknowledges that the short term rates—repo, interbank, 91-day treasury bills, have continued to decline consistent with its monetary policy signals but onward transmission of the signals to longer-term rates (lending rates) is still very slow.
“The wide spread between lending and deposit rates is a sign of inefficiency in the banking sector,” said CBK Governor Prof Njuguna Ndung’u.
Despite repeated signals that have seen the Central Bank Rate (CBR) drop seven times, banks have remained adamant, saying the tenor and cost of funds (deposits) do not allow them to respond swiftly to monetary policy signals.
However, according to Kenya Bankers Association (KBA) Chairman Richard Etemesi, there is a mismatch between deposit tenor and loan tenor in Kenya. He added the deposit tenor in Kenya is short term.
“The CBK signals affect the short term-end of the market, but the difficulties we face is that banks don’t have access to long-term financing,” said Etemesi, also the chief executive of Standard Chartered Bank of Kenya.
According to KBA, 41 per cent of the total deposits in the banking industry are of the tenor between one to five years. Consequently, members of the association 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.
Growing deposits
According to second quarter of 2012 Banking Sector Performance Development, the sector’s gross loans and advances increased from Sh1.24 trillion in March 2012 to Sh1.29 trillion in June 2012, a growth of 4 per cent.
Deposits, which form the main source of funding for the banking sector, accounted for 75.5 per cent of total funding liabilities, growing by 6.4 per cent from Sh1.56 trillion in March 2012 to Sh1.66 trillion in June 2012
Financial analysts attributed the improved performance to increased margins between lending and deposit rates enjoyed under the high-interest rate regime that kicked off in the second half of last year.
“The sector benefitted from wider spreads in the first half as the deposit rates did not grow commensurate with their lending rates,” said Vimal Parmar, head of research at Kestrel Capital.
