Banks not suffering, let them lower interest rates

It requires no expert to tell anyone that the price of a commodity is beyond their reach. The pocket easily determines that. Thus, the current debate about whether or not to regulate interest rates has been, for the ordinary person, more academic than practical.

The hard facts are that the price of money is beyond the reach of most Kenyans. While many Kenyans are just beginning to develop the saving culture, the returns on the same are dismal. It cannot be considered good business, if a deposit of Sh1,000 into a savings account earns about Sh20 after one year. Hawking peanuts would most definitely bring in more than that in a day.

And yet, if the peanut hawker were to borrow the same Sh1,000 for one year, he would have to pay a Kenyan bank about Sh250 in simple interest. This kind of business makes sense only to bankers and economists — not to Wanjiku.

One of the biggest fallacies upon which we have built the psyche of our nation is competition. Perhaps because we produce marathon runners, we seem to believe that everything must be based on completion.

That is perhaps why our education system has been solidly anchored on competition, rather than learning. Like Ikolomani bull owners, we breed our students for eight or four years, then set them against each other, awaiting to celebrate winners on public media. Likewise, in the business sector, companies compete on their bottom lines.

Banks, in particular, have been on a cut-throat competition to report super profits to be considered successful. The consequence is that all manner of tricks, including unethical ones, are used to emerge or stay at the top — students cheat, schools manipulate, and banks rip off their customers.

It is an undeniable fact that regulation is not advisable in a liberalised economy. The cost of goods and services are to be determined by market forces.

The challenge, though, is that with the high percentage of the population living in poverty, the power to influence the fundamentals of economic activities is seriously undermined. Thus, many are left at the mercy of a cartel-like business sector that seems to artificially set the pricing levels of basic services and commodities.

And yet, the same cartels cannot countenance any form of price regulation. For a long time, this was the case in the oil sector. Oil companies readily raised pump prices whenever the cost of importing and/or refining oil went up, yet no such speed was ever seen when the costs came down. It often took threats from the government to see the prices shed a few cents.

Parliament was eventually forced to introduce some price regulation, albeit against a spirited fight from oil companies who threatened that the economy would collapse under such regulation.

The story has been the same in the banking industry. Every effort to bring down the cost of borrowing has been strongly resisted, with threats that it would adversely affect the economy.

But just like in the oil sector, the government was forced to institute some minimal guidelines by introducing the Kenya Bank Reference Rate (KBRR). Banks are therefore required to use KBR rates set by the CBK in their loan pricing. Whereas the CBK was upbeat that this would boost the supply of credit to the private sector, skeptical observers have been proved right. Few banks, if any, reduce their lending rates in tandem with the KBR Rate except of course when it goes up.

Whereas some very strong arguments have been proffered against capping interest rates, I am no economist and therefore cannot reason for or against them.

What seems obvious though, is that a fully liberalised system in the banking sector has not, and may never yield a credit regime that is within the reach of most Kenyans. In fact, according to Daniel Thornton, of the Federal Reserve Bank of St Louis, the hypothesis that “the markets will do all of the work in controlling the funds rates... has been proven wrong numerous times.” The system is clearly prone to abuse, especially in a small economy like ours.

Reducing the lending spread and capping the price mark-up therefore seem to be reasonable ways to protect a poor majority. After all, judging from the super profits reported year after year, the banks cannot be said to be operating on shoe-string budgets — yet Wanjiku is.