Cost of loans to remain high, say banks

Mr Habil Olaka: We don’t know when lending rates can come down. FILE

What you need to know:

  • Bankers say borrowing rates could remain at the current average of about 17.84 per cent until the cost of customer deposits drops.

Commercial banks have said that the era of costly loans could last longer despite the significant fall in political risks following the peaceful handover of power after the elections.

The bankers say borrowing rates could remain at the current average of about 17.84 per cent until the cost of customer deposits drops, adding that they are also watching inflation trends.

“We expect that lending rates will come down when deposit rates come down as well. It is only that we don’t know exactly when this will happen,” said CEO of the lenders’ lobby Kenya Bankers Association, Habil Olaka, in an interview.

Mr Olaka said the bankers were also looking at the stability in the level of prices as they tried to determine whether they should change their lending rates.

“Inflation is a very important indicator of whether interest rates will come down or not. There have been good rains and food prices may not rise, but how about international oil prices? Banks are evaluating this even as the CBR falls,” said Mr Olaka.

The expensive deposits taken by banks from late 2011 as they fought liquidity difficulties till mid last year are still bogging down the lenders.

Latest Central Bank of Kenya data show the average base lending rate is 17.84 per cent, which is only down by about two percentage points from the average of about 20.3 per cent when the Central Bank Rate (CBR) was at 18 per cent in between December 2011 and last July.

By contrast the CBR, which is supposed to signal to the market the general direction of interest rates, has fallen consistently by 8.5 percentage points in the past five rate-setting meetings to 9.5 per cent.

The fall in overall inflation has also not been matched by fall in lending rates. Inflation has fallen drastically to 4.11 per cent in March since the peak of 19.72 per in November 2011 when interest rates were also rising rapidly.

Deposit rates are currently at an average of 6.29 per cent, but had reached 9.04 per cent in February 2012 at the height of the spike in interest rates. The interbank rates have also fallen from about 20 per cent to the current figure of 8.11 per cent.

Analysts have said the elimination of uncertainty relating to the outcome of the polls has made the economic environment more predictable, which should contribute to stability on interest rates.

Food and international oil prices in the coming months will affect inflationary expectations with implications for interest rates. If food prices remain stable, food-related inflation will remains low.

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