Central Bank of Kenya. In a bid to curb the runaway inflation and to prop up the weak shilling, the Central Bank of Kenya (CBK) has embarked on raising the central bank rate (CBR) to the current 16.5 per cent. File
In a bid to curb the runaway inflation and to prop up the weak shilling, the Central Bank of Kenya (CBK) has embarked on raising the central bank rate (CBR) to the current 16.5 per cent. The CBR is the rate at which commercial banks borrow from the CBK and in turn it determines the interest rates that the commercial banks charge borrowers.
What we have seen in recent days are numerous advertisements by various banks making upward adjustments of their base lending rates.
We have messengers of doom running all over the place ringing the death knell on our economy yet many moons ago commercial banks were lending their money to the public at interest rates in the region of 30 per cent per annum. Back then our country still continued to function despite the lack of necessary investment in the public sector.
What these messengers of doom fail to highlight is the ugly side of the low interest rate regime that has prevailed for the last eight years. These low interest rates led to the rapid growth of “unsecured loans”. These loans led to hyper consumerism in the country.
Anybody with a steady six- month income could buy with a loan the most sought after status symbol in the country, a car. This led to traffic jams in Nairobi, Mombasa and Kisumu causing billions of shillings in lost man hours. The high fuel prices could be in part attributed to the high demand for the commodity.
Kenyans sought immediate gratification of their wants and needs as opposed to deferred gratification via savings. I was speaking to a bank manager in one of the leading banks in the country and she confirmed that 90 per cent of the unsecured loans are spent on conspicuous consumption such as electronic gadgets, sofa sets and the like.
Whereas consumer spending is good for employment as seen in the mushrooming of “exhibition stalls” in every nook and cranny, what is the real long- term cost to the nation and its economy?
The question begging for an answer then is what would have been the end game with the low interest rates regime? In my view, a credit crunch in the magnitude of the one experienced in the global economy from July 2008.
In the United States for instance it is virtually impossible to buy anything in cash even if you have the money. All retailers insist on credit sales preferring to know your credit rating as opposed to accepting cash.
A childhood friend who lives in New Jersey tells me that he wakes up in a house he does not own, wears clothes he has not finished paying for, drives to work in a car that is on hire purchase and settles down into the office to power on a computer that is on hire purchase.
The long and short, most of the things he uses are on credit, well up to and until the last payment to the merchant is made. On the contrary when he lived in Kenya he drove his own car, slept on a bed he had paid for in full, watched his own television set and wore clothes he had bought.
The high interest rate regime is welcome. We shall finally resume deferred gratification where spending is based on calculated reasoning as opposed to impulse and keeping up with the Jones’.
Mr Ndirangu comments on economic issues.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
