CBK governor Patrick Njoroge puts big banks on the spot over high interest rates

A currency dealer counts Kenya shillings at a money exchange counter in Nairobi. Average lending rates in the market had crept up to 17.4 per cent last month, up from 15.7 per cent in August and 17.2 per cent in November 2015.

NAIROBI: Large commercial banks are charging borrowers the highest interest rates, defying the Central Bank of Kenya's directive to cut the cost of credit on loans.

CBK has now summoned all banking chief executives to a meeting this morning to address the anomaly as part of a market-wide push to slash lending rates. Without giving names, Governor Patrick Njoroge said he was deeply disturbed that the large banks were now abusing their market dominance, which borders on illegality.

"It is more pronounced with the large banks and that's very troubling for me," Dr Njoroge said of the rise in lending rates over the last four months. Typically, the smaller lenders should offer costlier loans because they do not have a wide base to absorb costs including interest expenses on customer deposits.

The big lenders were throwing their weight around, emboldened by their large network of branches and services, and deposit base, he added. Average lending rates in the market had crept up to 17.4 per cent last month, up from 15.7 per cent in August and 17.2 per cent in November 2015.

"I will direct it to them tomorrow (today) and we should all be making them uncomfortable," the CBK boss said adding, "They must start doing the right thing."

Njoroge has been unrelenting in his call to commercial banks to cut lending rates since he took up office mid 2015 where as the country's top banker. He has severally accused the lenders of taking a short-term view in their respective businesses and lacking the best interest of the economy in their decision-making.

High cost of credit tends to discourage borrowing for consumption and investment, going a long way in reducing the level of economic activity. When borrowers stay away from banks, they have less to purchase goods and services. In that scenario, there are fewer customers for producers to stoke a cycle of reduced production and discourages new investments.

Njoroge is specifically disappointed that banks are making huge profits through the wide interest rate spread – the difference between what banks pay on deposits and the rate they charge on loans. "Relative to their peers in the region, the interest rate spread is humongous," he said of the 9.7 per cent average profits gained from loans versus the cost of funds for commercial banks.

The lenders have previously defended their decision to keep their rates high, citing that the cost of term deposits were exorbitant. Njoroge's concerns are shared by millions of borrowers in Kenya who are servicing costly loans in the absence of laws that should otherwise regulate these.

But CBK said a proposition on regulating lending and savings rates would be dangerous for the stability and growth of the entire banking sector. Already, there has been a failed attempt to regulate lending rates through a proposed legislation, commonly known as the Donde Bill.

But even after commercial banks successfully lobbied for the defeat of that motion, a fresh attempt is on the cards by National Assembly Deputy Minority Leader Jakoyo Midiwo. That would be disastrous for the banks, but then they too have a responsibility, Njoroge said.

Commercial banks have also been condemned for the low uptake of mortgages, estimated at a partly 35,000 across the market at present, owing to the high lending rates and a myriad of requirements for prospective home buyers.