Markets & Finance

Governor: CBR cycle shouldn’t be bumpy for banks

cbk

CBK governor Patrick Njoroge: Consumers can drop banks they think are exploitative. PHOTO | FILE

Kenya’s banking sector has been significantly shaken by a law capping interest rates.

It has left in its wake turmoil at the stock market where banking stocks have lost an average 25 per cent, wrought confusion in the deposit market and left the budding mobile lending market at a cross-roads.

On Wednesday, Central Bank Governor Patrick Njoroge addressed the Press since the law came into force. The excerpts. Why did you choose the CBR to be the base rate and not Kenya Banks Reference Rate (KBRR), which the banks have been applying?

CBR is reviewed every two months and is likely to cause a lot of turbulence in the lending market. We saw this only yesterday when banks are now being asked to 10 per cent as the base rate barely one week after they were asked to apply 10.5 per cent? 

I don’t think so. You have to appreciate what the monetary policy committee is doing. Its business is monetary policy and this should not be muddled with other considerations. The CBK is very clear that the CBR is our signal rate. Some people believe it should be KBRR and have gone to court. We will be addressing those concerns.

What is the impact of the new law on the sector especially small and medium sized banks given the squeeze of interest margins and do you expect it to trigger consolidation?

We have communicated the potential concerns of this law even before it came to effect and those concerns remain. This is why we need to monitor things collectively, not just from the point of ... are interest caps being adhered to but also look at it in terms of financial stability.

We have to wait and see. Yes banks will have to take a loss in several ways but they had interest spread of 11 percentage points.

In most comparable countries the spreads would be half of that at five and six percentage points. Also in terms of return on equity, the average for Kenya is around 30 per cent, which, in effect, means you are getting a full return on your equity in three years - where else can you get such a return?

In Europe it is in the order of between five and seven per cent, in South Africa around 15 per cent, the point is there is scope for lowering interest rates. It is not that we do not believe that interest rates should not be cut.

Banks have been investing in Treasury bills and bonds since the law was passed. Will this crowd out the productive private sector?
It is true once the law was signed some bankers tried to move their assets to government securities. However, this is not an open door because there is also a supply constraint driven by the government borrowing programme.

There have been oversubscriptions but the government has kept pretty much to the limits it had put out so there is no a sense of “because there is demand we are expanding the borrowing”.

On Tuesday, the MPC lowered the Central Bank Rate to 10 per cent from 10.5 per cent, indicating banks were expected to lower their lending rates with a similar margin. How soon should consumers expect this to reflect on their loans?

The law says that the cap should be CBR plus four percentage points. The CBR today is 10 per cent, add four points you get 14 per cent; that is the law.

Commercial banks have reacted to the new law with the introduction of new fees for their services to protect revenues. What is the CBK doing about this?

There is a certain procedure in terms of charges and new products; you can’t just introduce a new product without approval from the CBK. So we will follow on that.

We are the regulator and I don’t think banks would want to attract the wrath of the regulator. The issues are very clear to me and if we stick within those boundaries.

There are some things that are not difficulties but appear to be so because banks are just trying ways to manoeuvre out of things.

Have you received any requests to introduce or increase fees and have you approved any?

There hasn’t been a surge in number of requests as one would suppose. On the approval I would leave that out for the moment.

Some banks have been charging one-off facilitation fee for loans disbursed in partnership with telcos, such as M-Shwari. Is the charge also considered as interest and should this also be capped?

I would rather not be specific but one of the most important things is, we need to provide more power to the consumer because your question indicates a very passive consumer.

Consumers need to be armed with information so that they vote with their feet. If your bank is providing you with services at a fee or “giving you kizungu mingi” you can move to another bank.

Can you offer direction on mobile loans? The market needs to know whether the new law affects them or not. There is also need to speak to the subject of ongoing reclassification of savings accounts to non-interest earning transactional accounts?

I would rather not answer the two questions because, in effect, that is where the fight is. The discussion here is not being fair – what banks are doing is - if it favours me I define it in a certain way- but as a regulator I cannot be dragged into that.

Isn’t that the role of the regulator?

The role of the regulator is to implement the law.

Microfinance banks have not passed the benefit of the new law to their customers, arguing they are not governed by the Banking Act.
I would rather not talk about them now. You will hear our representation on these things soon.