Commercial banks in Kenya at crossroads
Commercial banks are at crossroads. They have starved the private sector of credit in favour of investing in short-term treasury bills and bonds. But their reliance on Government borrowing is facing a real test that presents danger from the Central Bank of Kenya (CBK). The apex bank may be persuaded to lower the Central Bank Rate (CBR) by the stability of the country’s economy.
A lower rate would force banks to take a big hit on their bottom line. This proposition is borne out by last year’s events when a 0.5 percentage point drop in the CBR cost the lenders Sh25 billion in lost income. It may be plausible to argue that the National Parliament is in no mood to repeal the law capping the interest rate.
This is despite the heavy lobbying from the International Monetary Fund (IMF) which withdrew its precautionary budget support facility after failing to persuade the government to force MPs to do its bidding.
SEE ALSO :Kenya in talks with IMF over new standby facility
The IMF’s prediction that the economy risked facing heavy winds in the event of the withdrawal of their facility has not come into fruition. The market has also continued to ignore the Bretton Woods assertion that the Kenya shilling is over-valued.
This is despite some of their local supporters taking up the refrain that the country’s economy is in danger unless the government toed the IMF line.
The failure of these scare tactics leaves the banks with few options if they are to continue making reasonable profits.
They have to loosen their purse strings and rump up their lending to the private sector.
SEE ALSO :MPs set for new bruising battle over interest rates
Treasury’s plan to set up a Credit Guarantee Scheme for SMEs may act as a catalyst to banks that have been reluctant to lend to this sector seen to be risky or defaulting on payments.
Even as banks mull their collective and individual decisions to lend to the sector, it may be useful for them to take a second look at the loans and overdraft portfolios of corporate borrowers. There is a possibility their biggest defaulters are in this sector that has been going through wrenching changes following the massive importation of cheap goods from China and India.
This means the banks may be well advised to join their industrialist colleagues in lobbying the State to step up its anti-dumping and anti-counterfeiting efforts.
These efforts would bear better fruits were representatives of all major stakeholders directly involved.
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International Monetary FundCentral Bank Ratetreasury bills and bonds