For economy’s sake, bring down cost of credit

On Wednesday this week, all attention will be on the Central Bank of Kenya’s Monetary Policy Committee as it meets to review market developments and evaluate the outcomes of its monetary policy stance.

Expectations are high that this top policy organ will cut the Central Bank Rate (CBR), currently standing at 16.5 per cent. This is due to encouraging monthly inflation figures with that for August 2012 pegged at 6.09 per cent.

Interestingly, while the macroeconomic environment remains favourable with inflation on the downward slide and the Kenya Shilling US dollar exchange rate stable, this scenario appears not reflected on the pockets of average Kenyans on the street or even the working class.

While we acknowledge that transmission of any monetary policy adjustments has a time lag before transmission is apparent in the rest of the economy, it is prudent for Central Bank of Kenya (CBK) to ease further its grip on the local credit market.

Figures on inflation and shilling exchange rate demonstrate the fact that CBK’S monetary policy stance is achieving its objectives. This is the more reason why CBK should also move fast and free the credit market, to provide this economy, which has been starved of cash, to thrive again.

Any delays in cutting the CBR could deal a heavy blow on an economy that is on a slowdown and it need of resuscitation.

Strain on consumers

A recent credit report by the CBK indicates that while demand for credit remained unchanged in the first six months of 2012 in the agriculture, mining and quarrying, tourism as well as energy and water sectors, it increased in the personal/households and manufacturing sectors.

Demand for credit decreased in real estate and building and construction sectors. This survey indicates that cost of borrowing was the greatest factor that led to a decrease of demand for credit.

Individuals and households who have taken up bank credit are struggling to service their loans under the current interest rate regime. Banks are charging between 21-25 per cent on their loan products, putting a huge strain on consumers of bank credit.

It is worrying that credit applications for building and construction sectors dropped from 800 in March 2012 to 428 in June 2012, while credit applications for real estate sector dropped from 611 in March 2012 to 402 in June 2012. A slowdown in building, construction and real estate due to high borrowing costs is a red flag for CBK to loosen its purse strings.

In the event that CBK lowers the CBR, we expect commercial banks to respond fast and also lower their base lending rates. We acknowledge the fact that banks will react differently to any movements on the CBR depending on their size and price of deposits they hold within the vaults.

 While some banks are able to source for cheaper funds and therefore are able to pass on this benefit to borrowers, others have more expensive deposits in their vaults and will therefore be reluctant to lend cheap. Consumers should make informed choices and vote with their wallets depending on how their bank reacts to the MPC policy directives.

Available figures from World Bank databases show that lending rates in Kenya, the rate charged by banks on loans to prime customers, has been rising.

This rate has increased from 13.3 per cent in 2007, 14.0 per cent in 2008, 14.8 per cent in 2009, and 14.4 per cent in 2010 to 15.0 per cent in 2011.

Whether part of the reason consumers in Kenya cannot access cheap credit is because of structural problems and inefficiencies within the banking industry is a subject for policy makers and analysts.

Informed choices

What we propose is for CBK to publish individual results on individual bank’s lending rates, cost of funds, rates charged for withdrawing from ATMs and vital figures and information on customer service levels. These will enable customers make informed choices and force those banks that cannot shape up to ship out.

It is unfair and immoral for bank customers to pay more for credit because of an industry that abhors public scrutiny, operates like a cartel and is insensitive to its customers.

In its last Monetary Policy Committee (MPC), the CBK lowered the Central Bank Rate, the rate at which it lends out to commercial banks, from 18 per cent to 16.6 per cent.  There is more headroom for it to make further cuts without upsetting equilibrium at the macroeconomic level.