Banks dampen borrowers’ hopes for cheap loans

• Commercial banks will wait for the cost at which they mobilise deposits to fall before passing the savings on to borrowers.
• Both KCB and CFC Stanbic cut their base rates to 19 per cent, from 22 per cent and 22.5 per cent respectively.
• Most of the lenders have however, maintained their real lending rates in the range of 25 per cent, trending cautiously even as the inflation rate has plunged to single digits.

Borrowers will have to wait for the latest cut in interest rates to translate into significantly lower cost of loans, the Kenya Bankers Association (KBA) has said.

Mr Habil Olaka, the chief executive of the bankers’ lobby, KBA, said commercial banks will wait for the cost at which they mobilise deposits to fall before passing the savings on to borrowers.

Two commercial banks, KCB and CFC Stanbic, Monday reduced their minimum average lending rates to 19 per cent, about six percentage points above the Central Bank of Kenya emergency window lending rate.

“The transmission mechanism after CBK rate cut is not instanteous,” said Mr Olaka. “Individual banks may decide as a competitive strategy to move their lending rates down even before its cost of funds comes down. This is equivalent to temporarily sacrificing your margin to get market share, which is often a competitive strategy players employ in such an industry,” he added.

More than 12 banks, including the major lenders, have responded to CBK’s monetary easing stance that has seen the Central Bank Rate drop by five percentage points to 13 per cent in about two months.

Most of the lenders have however, maintained their real lending rates in the range of 25 per cent, trending cautiously even as the inflation rate has plunged to single digits.

Both KCB and CFC Stanbic cut their base rates to 19 per cent, from 22 per cent and 22.5 per cent respectively.

The lenders charge a premium to borrowers that is added onto the base rate based on their evaluation of the customers’ default risk.

“The cost of credit is improving and monetary policy indicators all point towards a stable economic environment,’’ said Martin Oduor-Otieno, the KCB Group CEO.

KCB’s mortgage base rate will also drop from 19 per cent to 18 per cent while borrowers under the bank’s “mortgage advantage” scheme will pay 16.5 per cent, one percentage point less.

On Wednesday last week the CBK announced a rate cut of 3.5 percentage points on its benchmark rate to 13 per cent from 16.5 per cent.
In July, CBK set the CBR at 16.5 per cent from 18 per cent which prompted a few commercial banks to cut their lending rates.

“The Monetary Policy Committee noted that interest rate spreads remained high suggesting that these cost reductions had yet to be fully transferred to bank customers and the economy at large through declining cost of credit,” said Central Bank governor Njuguna Ndung’u said in a statement released on Wednesday.

Suprio Sengupta, the general manager of I&M Bank said lending rates move in tandem with deposit rates, which is the cost that banks incur to mobilise funds for onward lending to borrowers.

Central Bank governor Njuguna Ndungu, while making the latest announcement on the benchmark rate, said that the regulator has provided avenues that reduce the cost of doing business for banks including allowing for the integration with mobile phone financial services platforms, movement into the agency banking network and licensing of Credit Reference Bureaus, all of which have resulted in lower costs.

“The Committee [Monetary Policy Committee] noted that interest rate spreads remained high suggesting that these cost reductions had yet to be fully transferred to bank customers and the economy at large through declining cost of credit,” said Prof Ndung’u in a statement released on Wednesday.