It is time Ndung’u waved a sword at banks

By Timothy Makokha

Watching the Central Bank Governor Njuguna Ndung’u talk about lending rates last week, one could not help but see a pitiful fellow flagging a meek monetary regulator.

His inaudible nudge came shortly after CBK’s Monetary Policy Committee (MPC), for the umpteenth time, cut its lending rate by 75 basis points to seven per cent, signalling the Government’s intention to continue reducing the cost of credit as a way of spurring economic growth.

The good old Professor was speaking at function that sought to explain the Government’s motivation to cut lending rates — and aptly he did.

In doing this, Ndung’u was not short on persuasion. The upside risk to inflation is low – easing from 6.7 per cent in September to 6.6 per cent in October, credit risk is declining, there is the added imperative to cushion the budding economic recovery and that the banking sector is stable and sound.

The committee could have had more reasons to cut the lending rate. A study of the second and third quarter economic indicators signalled a domestic economy riding over the global economic crisis to recovery and marked progress in the implementation of Treasury’s stimulus package, which provided good basis for consumer spending.

High lending rates suffocate economic growth, discourage potential borrowers and increase chances of loan defaulting.

The cut in the lending rates, therefore, was ordinarily intended to invite commercial banks to cut their interest rates on loans in a move that would have boosted credit availability.

While CBK has reduced its lending rate to the lows of seven per cent in an as many times this year, commercial banks have kept their average lending rates oscillating between 15.09 per cent and 14.74 per cent.

So while Ndung’u’s call that commercial banks play their part in economic recovery by lowering rates is well intentioned, it is hardly sufficient to bring about the desired results.

In what looked like his pitch of the day, Ndung’u outfoxed himself and gave away what we have always suspected about CBK: That as a regulator, CBK is incapable of rallying a policy around which commercial banks can coalesce to drive the economy in any defined direction. Tired and perhaps aware that neither CBK nor the investing public has any recourse to rein in errant commercial banks, he nevertheless urges the public to bargain for better terms from their banks.

Unaffordable levels

To ask the banking public to bargain with commercial banks for lower rates is an admission of failure. By this simple statement, the Governor told that CBK cannot do what it was created to do.

By now, certain things must be clear to Prof Ndung’u. First, that it is not routine to negotiate from a point of weakness and when this happens, the results can only go one way — in favour of the mighty.

There is very little justification for the banks to perch their rates to unaffordable levels, especially in the face of a greening economy.

Except for the after-shocks of the global meltdown, banks have hardly suffered any losses related to uncertainties in the economy.

And finally, Ndung’u must also be aware that the people that negotiate with banks are not those that will wait for advice. Rather, they are those that do so from the comfort of their homes and offices – calling bank managers demanding better returns on their savings and lending rates on every loan they sign.

Many Kenyans, however, expect CBK protection from exploitative institutions.

It may take the imposition of the retrogressive ceiling on rates and price controls, but if that is what it will take CBK to restore sanity in the banking sector, so be it.