Showdown over costly loans looms

By James Anyanzwa and Macharia Kamau

Kenya: Commercial banks are headed for a collision with the Jubilee administration over a high interest rates regime that has increased the cost of doing business and reduced the country’s competitiveness.

Propelled by the drive to deliver on its ambitious manifesto, create a million jobs annually and lift millions of Kenyans out of poverty, the coalition appears to be waging a fierce battle with lenders over the escalating cost of credit.

Concerned about a possible collusion in determining interest rates and the billions of shillings banks are making in profits, the Government has announced stringent proposals to streamline operations in the banking sector.

Cartel-like behaviour

These will including monitoring how banks calculate their interest rates and reviewing the cartel-like behaviour in the industry, which is seen as having a hand in the growth of interest 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 loan products are highly priced.

But the Government has dismissed as “meaningless” issues to do with customer risks and collateral.

“I have listened to the issues that have been raised ... but in my estimation, they don’t amount to a reason. I think they are just excuses. Really, we should be able to have more in-depth discussions about this,” said Deputy President William Ruto, speaking at the launch of World Bank’s Kenya Economic Update on Wednesday.

“Growth is meaningless unless it is inclusive. There is really no benefit for us to say that this bank made Sh7 billion or Sh10 billion in profit when we have millions of people walking on the streets who can hardly afford a meal.”

Mr Ruto urged commercial banks to embrace ethical business practices, adding that the Government was ready to help develop business models that would drive down the cost of credit.

“I think we all must act responsibly, and the Government will act in consultation with all the players who want to move this country that way,” he said.

“Whatever the requirements of the financial sector that will help us develop a model that brings inclusive growth, that assists banks manage their risks so that we can get more money at rates that are affordable to as many players as possible, that would be really the way to go.”

The Government is betting on the private sector to stir economic growth and push the country to middle-income status by 2030.

But the sector’s operations largely hinge on the availability of affordable credit from financial institutions.

“I think the single critical role that the financial sector and banks can do for us as a country is mobilise savings so that we can use these for investment and to fire the engine of our growth. The Central Bank must take the lead on this matter,” Ruto said.

The sector’s hardline stance on lowering the cost of credit has ruffled market observers and raised concerns on the influence of the country’s monetary authorities and political leadership.

Previous attempts to cap interest rates have yielded little.

Last year, a move to amend the Finance Bill 2011 and introduce a clause to cap interest rates was defeated when tabled in Parliament.

The debate on increased regulation of interest rates started in 2011 when rates by commercial banks went to a historical high of 30 per cent.

Currently, banks are offering loans at an average rate of 17per cent, but this is still seen as too high.

Spur spending

On November 5, CBK decided to hold the benchmark interest rate unchanged at 8.5 per cent for a sixth straight time in an attempt to spur household and business spending.

But commercial banks remain adamant, arguing that the tenure and cost of funds (deposits) do not allow them to respond swiftly to monetary policy signals.

Failure to respond to CBK’s signals for a lower interest rate regime has seen the banking regulator challenge lenders to explain why they are unwilling to lower their credit rates.

“Banks are profitable. You must make profits to sustain yourself in business. But this should also be in tandem with the reducing of lending rates,” Prof Ndung’u said at an earlier press briefing.

“Banks should let us know what sustains lending rates, is it costs or risks? We would like to see how we can reduce the costs of transactions and mitigate these risks.”

The number of Kenyans defaulting on repayments of their loans has been on a steady rise as hard economic times persist. The spate of loan defaulters has been blamed on high lending rates.

The result is that close to half a million Kenyans have in the eight months to August this year been blacklisted and might find it difficult to access credit in future.

The mass defaults — which has mostly affected bank customers — has been attributed largely to the high interest rates of 2011, when the cost of credit rose to upwards of 30 per cent.

Experts say a substantial chunk of the defaulters took up loans during this period.

Damning statistics paint a grim picture of commercial banks whose defaulters make up more than 90 per cent of non-performing loan accounts.

Analysts also attribute the growing levels of NPLs in the banking industry to increased lending to risky segments such as micro loans, SME loans and unsecured personal loans.

“There was a time when interest rates went beyond 20 per cent, and what we are seeing now in terms of non-performing loans are simply some of the carry over effects,” said Mr John Kirimi, Sterling Capital’s executive director.

Competitiveness

National Treasury Cabinet Secretary Henry Rotich has already directed the Competition Authority of Kenya (CAK) to review competitiveness in the banking industry and establish if the high interest rates are market driven or a result of collusion.

There are 43 commercial banks, which should ideally create a highly competitive financial services industry.

“The high interest rates are a concern and might be slowing down economic growth. There is need for CAK to review competition in the banking sector,” said Rotich.

The interest rates spread — which is the difference between lending and deposit rates — currently stands at 10.57 per cent and is one of the highest in the continent.

According to the Kenya Bankers Association, the level of interest rate spread is associated with the level of development of the financial sector.

“As the financial sector develops, the spreads tend to narrow,” said KBA.

“There is a strong conviction in the banking industry that there is scope for a further but gradual narrowing of the interest rate spread, a trend that will ultimately align it with those of better-developed financial markets.”

bizbeat@standardmedia.co.ke