Lower interest rates to encourage investments

Central Bank of Kenya Governor Patrick Njoroge has admitted that a cartel of top six banks is denying the economy the benefit of low interest rates. He revealed that large commercial banks are charging the highest interest rates, ignoring the CBK’s advice to cut the cost of credit on loans. There is no denying that most banks are on their way to reporting super-profits by charging high interest rates on loans, taking advantage of the wide interest rate spread — the difference between what banks pay on deposits and the rate they charge on loans.

Average lending rates in the market had gone up to 17.4 per cent last month, up from 15.7 per cent in August and 17.2 per cent in November 2015. This means borrowers may have to reduce their savings to service their loans. Or in the worst case scenario, default on loan repayments. Cases of borrowers losing their homes and other assets to lenders due to inability to service loans are quite common.

But such eventualities can be minimised in some instances, especially when lending rates are friendlier and the repayment costs lower. Most players maintain that the banking industry should remain a liberal market, but a solution for this exploitation must be found. High cost of credit tends to discourage borrowing for consumption and investment, and ultimately stagnates economic growth. Commercial banks should reduce lending rates to allow more people access loans and grow the economy.