Banks maintain cautious outlook on economy

By Jackson Okoth

Commercial Banks have been reluctant to lower lending rates, despite strong monetary signals from Central Bank of Kenya (CBK) for them to do so.

In its first meeting this year, the Monetary Policy Committee (MPC)- a key policy organ of the CBK, maintained the Central Bank Rate (CBR) at 7 per cent, the lowest level in two years.

The Bank lowered the rate by 75 basis points in November, but refused to lower it further in January, saying the benefits were not been passed on to the consumer

However, banks have continued to ignore this instrument as a severe credit crunch hits individual households, manufacturers and private business.

The economy slowed down after the 2007 post-election violence, and matters worsened by prolonged drought and the global financial crisis.

However, local banks were able to make adequate provisioning to safeguard their loan books.

But the slump triggered a credit crunch that forced many borrowers to default on their mortgage and loan repayments.

And with the recession gathering pace in 2008, fear spread among banks as they cut back on their loan books and their rapid expansion.

Incomes eroded

Banks with their niche in the low-end retail market, such as Equity Bank, also took a hit, as household incomes were eroded. Even those operating in the corporate segments were affected, as firms built up huge inventories, and cut back on their expansion and new projects.

And today, banks have become even more cautious about who they lend to.

Some banks are also looking to widen their profit margins in a bid to offset the losses they incurred from customers who fell behind on repayments.

Banks are also keen to cushion themselves from borrowers who may default on payments in the future. As a result, cost of credit has remained high.

"Commercial banks are yet to experience any increase in effective demand for credit, and cannot therefore lower their lending rates. There are also mixed signals, as Treasury continues to source funds more expensively from the domestic money market," said John Wanyela, CEO of the Kenya Bankers Association.

Players in the banking sector say cost of credit should be left to market forces of demand and supply.

"It is an issue of time. Commercial banks will lower their lending rates to attract borrowing from sectors recording strong growth," said Edward Gitahi, a fund manager at AIG Investments.

While forecasts indicate a strong economic recovery of between 3-4 per cent this year, bankers rely on figures to make commitments.

"We have not seen any significant increase in export orders. Foreign exchange inflows have not improved. This economy is still struggling like all the other economies," said Wanyela.

Banks usually price their loans on the prevailing economic environment. Banks consider slow performing economy as it influences a client’s ability to repay a loan.

How the economic recovery shapes up, including performance of key sectors, will also influence who is bankable.

For instance, due to a deterioration of the retail credit market, a number of banks have moved from conventional lending, to the more lucrative fixed-income debt market.

But while a slow down in the economy has led to collapse of short-term private consumption and investment, this bound to change as key fundamentals, which are still missing from the equation, fall into place.

"Although T-bill rates have been falling, banks have not passed this to clients. While banks will soon expand their lending, this may not be as fast as CBK would want," said Onchera Maiko, General Manager, British American Asset Managers (BAAM).