By John Oyuke

Interest rates in the country remain high despite signals from the Central Bank of Kenya (CBK) to commercial banks to cut lending rates.

Just last week, CBK cut its benchmark-lending rate (CBR) by two percentage points to 11 per cent last week. Interest rates on loans skyrocketed to an average of 25 per cent in October 2011 up from an average of 15 per cent a year earlier. Despite several cuts in the CBR since, banks have perched their lending rate at above 20 — making credit somewhat expensive for borrowers and increasing levels of bad debts.  According toCBK, recent drops in CBR have had only minimal impact in shoring up demand for credit with borrowing in a number of interest-rate sensitive sectors remaining flat and unimpressive.

“Demand for credit in agriculture, manufacturing, mining and quarrying, tourism, transport, financial services, real estate as well as energy and water sectors has remained largely unchanged,” CBK notes in its credit survey for the quarter ended September 2012.

Shilling on free fall

According to the report, credit in transport and communication Sector decreased. CBK Governor Njuguna Ndung’u has on several occasions expressed concern that banks are not transferring the overall effect of low base rates to borrowers.

Central Bank’s Governor Njuguna Ndung’u has on a number CBK’s Monetary Policy Committee (MPC) meetings expressed concern banks are not transferring the overall effect of low base rates to borrowers. “We have noted that interest rate spreads remained high suggesting these cost reductions had yet to be fully transferred to bank customers and the economy at large through declining cost of credit,” Ndung’u said.

Last week, Central Bank’s Monetary Policy Committee renewed hopes for lower lending rates by cutting CBR to 11 per cent from 13 per cent, citing easing inflation, stable exchange rate and improving economy.

Overall, inflation continued to decline in October falling to 4.14 per cent from 5.32 per cent the previous month. Faced with runaway inflation and the shilling on free fall, the MPC raised the indicative rate to 18 per cent in December last year.

By then, inflation was threatening to break the 20 per cent mark while the shilling had depreciated to lows of Sh107 to the dollar.

Commercial banks followed suit, raising borrowing rates on loans to over 30 per cent and over 20 per cent for mortgages, hence keeping credit out of reach for most of the productive sectors of the economy.

With easing inflation and a relatively more stable shilling, CBK has so far signalled the market that it is time to cut lending rates. However, the response from banks has been tepid.

Despite the latest CBK move, a senior banker says it will be a long and frustrating wait for customers before banks implement any meaningful rate cuts. “To cite lower inflation figures alone as justification for a more rapid reduction in interest rates misses the point,” he added.

Economists are warning that unless banks become more receptive, rate cuts are not likely to have major impacts — especially in interest-rate sensitive sectors like trade, financial intermediation, real estate and construction.

Ms Yvonne Mhango, Sub-Saharan Africa Economist at Renaissance Capital, said though CBR rate has reduced since July, no immediate material impact is expected on the credit growth because the country’s lending rates tend to be sticky.

Finance Bill 2011

She said as of August, the lending rate was still flat at 20.1 per cent, adding that they only anticipate the effect on lending from early next year.

“We think credit growth will only begin to show a marked recovery from first quarter of 2012, and that thereafter, the more interest-rate sensitive sectors will realise stronger growth,” she said. The sense of frustration over the apparent unwillingness by banks to reduce lending rates continues to be palpable among investors and even more so within a government which appears to have no tool to change course of things.

An earlier campaign by MPs to rein in high interest rates also failed with legislators allegedly being bribed to vote out a bill to fix the rates.

Kenya Bankers Association (KBA) denied the reports it had together with the finance minister, Njeru Githae, hosted a luncheon for MPs and gave them Sh50,000 each, which led to the no vote. Commercial banks had been opposed to a change in the Finance Bill 2011 that sought to cap the interest rates and charge on loans at no more than 4 per cent of the Central Bank Rate.

The Bill was to have been passed by end of last December but fears MPs would amend it to fix the interest rates resulted to delays tactics by Treasury as it sought to convince the lawmakers to drop the idea. KBA, CBK and Treasury unveiled a package of short-term actions in December 2011 which included extension of loan tenors, capping increase in loan repayment at 20 per cent and waiving of early repayment penalties.

KBA chief executive, Habil Olaka justified the proposals by the trio meant to alleviate the effects of high interest rates on customers, saying that the actions had eased loan conditions for customers.

However, as Githae noted last month, interest rates continue to remain high, with most banks base lending rates being above 18 per cent.

“I am particularly perturbed at the high interest rate spread (lending rate minus deposit rate) – as high as 12 per cent,” he said.

“This state of affairs is not conducive to investment and I urge banks to reconsider their positions and make interest rates even more affordable,” he said while launching NIC bank shares at Nairobi Securities Exchange (NSE).