Follow Central Bank lead on rates

By Standard editor

The Central Bank  of Kenya (CBK) has cut its benchmark lending rate — the Central Bank Rate (CBR) for the second time this year to support credit growth in the economy following a peaceful General Election.

In its latest move, last Tuesday, CBK’s rate-setting committee cut the benchmark rate by one percentage point to 8.5 per cent down from 9.5 per cent. The rate stood at 11 per cent in January.

This easing on the rate is viewed as a means of supporting credit growth and the wider economic recovery.

With the economy recovering from the March 4 election shocks, CBK’s latest move is clear signal for lending rates to come down. But most banks have been hesitant to cut. A number of sectors such as manufacturing, oil marketing, wholesale and retail have been hit hard due to an expensive credit environment.

Loans from commercial banks still remain expensive, with a number of banks taking advantage of the high interest regime to rake in super profits.

The fact that commercial banks are charging borrowers 18 per cent on average for loans while paying savers less than five per cent for term deposits despite the inflation rate falling from 19 per cent to less than five per cent has also raised eyebrows.

This has seen the interest margin — the difference between lending and deposit rate — grow to double digits, assuring banks of a windfall.

This is also compounded by the fact that most commercial banks impose the high charges for financial transactions making Kenya among the most expensive in the region.

While American, British and other international banking customers enjoy free checking accounts, in Kenya, banks charge hefty fees for every transaction a customer makes, from withdrawing cash to paying in cheques, getting a cheque book, or even a bank statement.

New report

Cumulatively, these transactional charges are ratcheting up a third of the Kenyan banking system’s income, in contrast to the situation in international banking rules. Globally, most banks have worked to attract customers through structures that deliver free banking.

It would be prudent for commercial banks to pass the benefits of low rates to consumers in terms of interest rates on loans to help stimulate credit growth in the economy. As it stands, Kenyans cannot afford mortgage with a new report showing that the high interest rates make mortgage payments twice as expensive as renting the same properties.

The revelation that mortgage financed houses are making losses at current rates, even where they are rented out, is more reason for banks to worry. This is likely to see the number of non-performing loans ramp up.

The continued high levels of commercial interest rates were stifling the local mortgage market and creating an obstacle to widespread home ownership, that urgently ought to be addressed.