The bankers had expected an increase in KBRR in line with a formula they agreed with the CBK but the regulator shoved aside the deal to retain the rate at last year’s level of 9.87 per cent.
That decision flew in the face of the KBRR, calculated as an average of the indicative Central Bank Rate and the average 91-day Treasury bill rate in the past six months.
Bankers told the Business Daily they plan to hold interest rates at current levels despite the CBK’s position that the cost of loans should come down.
“Of course we are disappointed that the MPC [Monetary Policy Committee] disregarded the KBRR but we feel we are in a comfortable position having factored in the steep rise in the cost of deposits at the end of last year. What will happen is that bankers won’t lower rates despite calls to do so,” said a chief executive of a local bank, who did not want to be named because of the hard stance the CBK has taken on the matter.
The central bank believes the interest rates spread enjoyed by banks are unjustifiably wide and need to be shrunk by a cut in interest rates.
“The interest rate spreads need to narrow down. They are in the order of 9.7 per cent, which relative to peers is humongous,” CBK Governor Patrick Njoroge said in his latest press briefing.
Lending rates currently stand at an average of 17.4 per cent — an increase from 15.7 per cent in August. The increase allowed lenders to widen interest spreads to the current 9.7 per cent from eight per cent previously.
The Kenya Bankers Association (KBA) refused to take the matter head-on, insisting instead that the KBRR was still developing and that the MPC’s failure to use it signalled the need to improve the pricing mechanism.
“We will continue with KBRR as we get to scenarios that had not been anticipated then we will tie any loose ends,” said KBA chief executive Habil Olaka.
The KBRR was a compromise between the regulator and the bankers to ward off popular calls for interest rate controls.
Members of Parliament and consumer protection groups demanded regulation of interest rates arguing that at more 20 per cent they were exploitative and only meant to drive the banks’ profitability.
The lenders argued they had to align their interest rates with yields on government securities, which represents an opportunity cost for the industry.
The Treasury’s appetite for debt has been cited as a key driver of higher loan prices as banks have the option of lending to the government at high and risk-free rates or at a premium to the high-risk private sector.
Return on the one-year government paper has in the past month risen to 14.9 per cent from 11.9 per cent at the end of November while the six-month paper is currently yielding 14.2 per cent up from 10.1 per cent over the same period.
The 91-day Treasury bill has moved by at least 2.6 percentage points to 11.2 per cent, creating fears of a second round of interest rate surge.
Dr Njoroge said that the standard base lending rate would have been 10.78 per cent were the KBRR formula applied, from the current 9.87 per cent, which would have opened the door for banks to increase rates by at least one percentage point.
Analysts see the CBK’s attempt to artificially set interest rates as an unnecessary meddling with an issue that should be left to market forces.
“We do not believe that the CBK should get involved directly in the business of pricing loans as Kenya is an open market economy and the CBK is not in the business of loan risk underwriting or pricing,” say analysts at investment firm Cytonn.
Cytonn argues that the regulator should focus on market structure issues such as increasing competition in the sector but stay clear of attempts to price loans.
“Given that government is borrowing at about 16 per cent, a proxy for risk-free rate, then loan costs of about 18 to 20 per cent, which are premiums of two to four per cent above government cost of borrowing, do not appear unreasonable,” says Cytonn, adding that deposit rates remain unreasonably low and only the depositors can take appropriate actions by re-pricing their deposits upwards.
Vimal Parmar, head of research at Burbidge Capital, said commercial banks were willing to increase deposit rates so as to mobilise funds they can invest in higher-yielding government securities.
He noted the banks were not willing to take a similar risk this time around as the increase in government returns was short-term, leaving them with expensive deposits in their books that were yet to be invested.
High lending rates snuffed public appetite for loans last year, with credit expanding by 18.1 per cent compared to 22.7 per cent a year earlier.
High financing costs were cited as a major contributor to drop in corporate earnings.
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