Despite the cut in the Central Bank Rate by 75 basis points last week. It is unlikely banks will lower interest rates that easily, after all they have long claimed that the CBR does not reflect the real picture of the market and prefer to use the Treasury Bill (T-Bills) rate as a yardstick.
Yet, everything indicates that rates should fall further. For the last two years, the economy has been in recovery mode, yet interest rates on loans remain high.
Part of the reason has been the high-risk premium the banks attach to borrowers because of the lack of a credit tracking pool. But the licensing of credit reference bureaus by the CBK should eventually see banks adopt a stepladder approach to loaning.
Because they will be able to track the credit history of borrowers using information from the bureaus, it will be easier for those with a good repayment record to get loans priced below the prevailing market rate.
This may not happen overnight, but in the meantime, banks are so heavily liquid and desperate for borrowers, that they are virtually hawking loans.
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This is money that the small and medium-sized enterprises badly need to grow.
Overall domestic credit rose by 26 per cent in the 12 months to June, compared to the same period last year. This is a good sign, and there is more.
Confidence builders
The latest CBK data shows overall inflation is on the decline and economic growth in the first quarter was a steady 4.4 per cent.
Even better, the exchange rate has stabilised, buoyed, analysts say, by investors’ expectations the Proposed Constitution will pass muster at the ballot.
Short-term interest rates (rates charged on T-Bills) have also been dropping, indicating that banks and other financial institutions have more confidence in the direction the economy is taking.
