Kenya to cut rates in early 2011

Policymakers want low lending rates to increase credit to businesses in order to accelerate economic growth. To press the point home, they cut the bank’s lending rate by 75 basis points to six percent at their last meeting.

Average base lending rates for all commercial banks stood at 14.61 percent in June, down from 15.17 percent in March, compared with deposit rates of around two percent.

“It is early days… all things equal this year, you could see the banks probably responding with low rates probably in the course of next year,” said Robert Shaw, a Nairobi-economist, referring to benign inflation and good weather, which has led to a recovery in the key agriculture sector.

Businesses complain the spread between the deposit and lending rates is too wide and it reduces the manufacturing sector’s competitiveness.

“The spread between deposit rates and the lending rates is so large that it is actually hurting industrial growth and manufacturing growth in this country,” said Jaswinder Bedi, chairman of Kenya Association of Manufacturers.

Bank executives told a recent forum on lending rates that costs of credit would fall after they clear expensive deposits, taken in before rates tumbled, from their books.

James Mwangi, chief executive of Equity Bank said some deposits on bank’s books were attracting a yield of eight percent while Treasury bill yields are under two percent.

“When you look at the funding side of the bank, it (yield) is up there. We will not be asking for too much by saying you hold your expectations until next June and then we will see,” Mwangi said.

Yields have fallen more than 300 basis points across the curve this year, leaving banks flush with cash, as executives get discouraged by the low yields from government securities.

“They are now going to start looking for borrowers but they are assuming (the funds) are going to get borrowed at 13/14 percent, what they have been getting in the past,” said Bedi.

A nine-year, amortised infrastructure bond by the government for 31.6 billion Kenya shillings is offering a return of 6 percent.

Risk factor
But bankers who look around for other lending opportunities should be compelled to lend at lower rates, said Wilfred Onono, the managing consultant of Interest Rates Advisory Centre, an organisation that works with distressed borrowers.

“In my view the central bank should do a little more instead of appearing to be totally helpless… they can bring some instruments that can regulate these interest rates,” Onono said.

Lynette Oyugi, an economist and researcher at the Nairobi-based Institute of Policy Analysis and Research disagrees with Onono, saying the banks’ business model differs from that of the central bank, making it difficult for them to follow its signals.

“The bank’s response is slow because central bank has no risks. It holds banks’ money and it lends to banks. There is no risk between central bank and the banking fraternity but the banks lend to individuals or to institutions who go to business and the risk is very high,” she said.

“As much as the central bank wants to see rates come down substantially, the risk factor has not gone down.”

Banks like Barclays Bank of Kenya raised their provisions for bad debts during the first-half of this year.

The central bank, together with the banks, have established a credit reference bureau, aimed at providing an information-sharing platform for banks on potential borrowers, to weed out those with dodgy credit records.

Still, Standard Chartered Bank of Kenya’s chief executive, Richard Etemesi said there were other factors that went into consideration while pricing loans, including the cost of securing collateral and banks’ infrastructure.

“You can’t defy the market in the end and if there is almost a universal resistance by banks to reduce their rates further, then I don’t think it is because they are being greedy, they have looked at all their factors and done their costs and are being cautious,” said Shaw.