CBK’s rate cut tips the scales in favour of cheaper loans

The Central Bank of Kenya yesterday cut the base lending rate (CBR) by 50 basis points, signalling a further drop in the cost of loans under the new legal regime that came into force one week ago.

The decision, made during the first monetary policy committee (MPC) meeting held since the capping of interest rates, means the base rate applicable in the pricing of loans now stands at 10 per cent from 10.5 per cent, effectively capping lending rates at 14 per cent.

“The committee remains concerned about the persistent slowdown in private sector credit growth. The MPC therefore decided to lower the CBR by 50 basis points to 10 per cent,” CBK governor Patrick Njoroge, who also chairs the committee, said in a statement, signalling concern over the allocation of finances to productive sectors of the economy.

Prolonged slowdown of lending to the private sector is seen as posing a risk to economic growth as productive sectors are starved of cash to finance their growth and expansion.

Dr Njoroge initially raised the red flag in May when he declined to release credit growth figures, arguing that they were so poor he had demanded a recalculation.

High cost of credit had been cited as a major hindrance to new borrowing and a contributor to continued pile-up of bad loans, but the MPC meeting is seen to have come too soon to assess the impact of the recent drop in the cost of credit with interest rate caps.

It is hoped that the capping of interest rates would reignite borrowing and drive economic growth.

Tax revenues dropped and job sackings rose last year as corporate profits plummeted and institutions turned to cost-cutting to remain afloat.

Total volumes of credit issued by banks have remained stagnant at Sh2.2 trillion since late last year with bad loans quickly rising to a decade high of Sh176 billion, 8.4 per cent of the loan book.

“The private sector credit gap (actual credit advanced to private sector minus the targeted credit allocation) widened rapidly from December 2015, implying that actual credit disbursed was much lower than the set target to support projected economic growth,” said CBK in its recent financial sector stability report as it raised the red flag over the slowdown.

It has recently emerged that the lower interest rates that came with the new law could save seven listed companies more than Sh800 million in financing costs, which can be deployed in other areas.

Meanwhile, commercial banks have more recently turned to lending to the government, which is offering lucrative returns with minimal risk of default.

In the three months between March and June, Equity Bank, one of Kenya’s largest banks by customer base, said its loan book shrunk by Sh6 billion while its investment in Treasury bills and bonds rose by Sh22 billion, underlining the slowdown of lending to the private sector.

StanChart, another big bank, reported that its loan book shrunk seven per cent to Sh114 billion from Sh123 billion over the same period.

The CBK said it was working with the National Treasury to ensure government borrowing does not crowd out the private sector.

The MPC’s decision went contrary to market expectations – many analysts having anticipated it would retain the rate constant so as to give time for the recent law to settle in the market.

Yesterday’s decision could yet see another round of turmoil on bank counters at the Nairobi Securities Exchange as investors take in news of the latest cut.

“While this is certainly a welcome respite for borrowers, it may enhance anxiety in the market, coming hot on the heels of interest rate controls,” said CBA Group analysts in a note to investors.

The MPC noted that inflation, at 6.4 per cent, was within its target band and does not expect new borrowing after the drop in interest rates to lead to a general rise in prices.

Return to depositors is also expected to drop to seven per cent from 7.35 per cent, as deposit rates are also pegged on the base rate.

Banks have shifted savings accounts of most depositors to non-interest earning accounts so as to avoid a spike in interest expenses.

The Kenyan shilling has remained stable against international currencies allowing CBK room to cut interest rates.

Dr Njoroge said CBK had foreign currency reserves equivalent to 5.2 times the monthly import bill of the country, which allows it to protect the shilling from any sudden movements.

Sudden exit of foreign investors from the NSE is likely to weaken the local currency.

“These reserves, together with the Precautionary arrangements with International Monetary Fund, equivalent to $1.5 billion (Sh150 billion), continue to provide adequate buffers against short-term shocks,” said CBK.