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.

Deposit rates

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.

CBR rate

 MPC reduced the Central Bank Rate by 350 basis points to 13 percent from July’s rate of 16.5 per cent signalling a downward trend in interest rates citing tamed inflation now at 6.09 per cent for August, a stable exchange rate that settled between the Sh83.90 to Sh84.32 last month and fairly stable short term interest rates as major contributing factors to the rate reduction.

While the noble intentions has always been to prompt commercial banks to avail cheap credit to consumers, the monetary policy instrument has largely not achieved the objectives. Although the CBK Governor Prof Njuguna Ndung’u has constantly piled pressure on banks to lower lending rates, the response has been slow or subdued.

 Commercial banks, in their quest for more profits, have largely refused to bring down interest rates, which currently averages 20.15 per cent, according to latest CBK data. They have remained adamant, arguing the tenor and cost of funds (deposits) do now allow them to respond swiftly to monetary policy signals.

“There is a mismatch between deposit tenor and loan tenor in Kenya. The deposit tenor in this country is short term,” said Richard Etemesi, chairman KBA and chief executive of the Standard Chartered Bank Kenya Ltd during central banks’ first monetary policy forum in Nairobi in August 2010.

“The signals that CBK provides affect the short term end of the market but the difficulties we face is that banks don’t have access to long term financing.” It is estimated that about 41 per cent of the total deposits in the banking industry are of the tenor between 1-5 years.

Banks 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 group. “Most banks provide loans with tenors between one to five years and have no influence on long term funding beyond this,” said Etemesi. Olaka argues that the cost of deposits is market driven and banks don’t have control over them.