CBK eases pressure on banks to cut rates

By Jackson Okoth and Reuters

A significant decline in cost of credit in recent months has persuaded Central Bank of Kenya (CBK) to ease pressure on banks to lower lending rates.

At its recent meeting, the Monetary Policy Committee (MPC), a top policy organ of the CBK, decided to maintain the Central Bank Rate (CBR) at six per cent. This committee meets every two months and sets the rate of interest at which the CBK charges on loans to commercial banks. The CBR signals the monetary policy stance of the CBK.

"Credit growth responded and bank lending rates had slightly declined. However, there is still scope for further reduction in lending rates," said CBK Governor Professor Njuguna Ndung’u.

MPC last lowered the CBR in July this year from 6.75 per cent to six per cent, a move that triggered a somewhat sluggish response from commercial banks.

"Factors that affect efficiency of the financial sector and give rise to higher costs of capital include challenges of realising on collateral and sufficiency of information on pricing risk," said Professor Ndung’u.

The MPC has recommended that CBK work with relevant Government departments to explore alternative dispute resolution models, which will reduce cost of borrowing. This is after the committee noted that models currently in use by banks do not reflect a competitive market environment.

excess reserves

A move by MPC to maintain the CBR comes at a time when commercial banks show evidence of excess reserves, an indication that the industry is able to meet any upsurge in demand for credit.

But why banks are slow to lower lending rates continues to baffle the market. Although the CBK has been piling pressure on banks to lower lending rates, the response to these monetary signals has been slow or muted at best.

There appears to be a mismatch between deposit and loan tenor, with the deposit tenor being short term.

" The CBK signals affect the short-term end of the market but the difficulties we face is that banks do not have access to long-term financing," Richard Etemesi, CEO Standard Chartered Bank Limited told a recent MPC forum.

But CBK is confident that introduction of credit referencing, agent banking, Automated Teller Machines (ATMs) and branches will increase access to banking and lower credit risk.