Since 1902

By Morris Aron

The Central Bank of Kenya (CBK) has constituted a team to spearhead the creation of development banking products to reduce inefficiencies that have hindered banks from pricing their credit in line with revisions of benchmark lending rates by the Monetary Policy Committee (MPC).

The team will also look at how to restructure the maturity profiles and interest rates pegged on long-term loans. The announcement comes days after a decision by MPC to opt for development banking concept as a solution to the inability of banks to respond to signals on interest rates from CBK.

The constitution of the team confirms CBK’s effort to influence banks to react to signals sent by MPC — the body that advises the financial market regulator on monetary policy issues — when it revise key benchmark lending rates.

The move is also an indication that CBK will not resort to directly controlling interest rates.

"What we need are strong institutions, incentives and frameworks that will steer the market and not laws capping interest rates," said CBK Governor Njuguna Ndung’u.

The MPC directives have proved successful in the short-end with CBK saying dropping short term interest rates — such as the repo, interbank and T-Bill rates, declining short term Government bonds and the lengthening of maturity periods as the results of its move.

Directive ignored

There has been concern among economists over the effect of MPC’s deliberations after it emerged that MPC’s directives were not effective on lending rates in the medium-term.

Banks say there is need to make the yield curve more predictable, reduce segmentation in the financial industry to address inefficiencies, and eliminate non-performing loans cases that drag on for ages in court.

CBK on its part, however, has maintained the high profit margin targets banks set for themselves, the risk premium on interest rates for long-term loans, high cost of credit, and information asymmetry in the financial industry are among the reasons for the financial institutions not heeding MPC’s decisions.