Cheap loans promise was hijacked

One of the key promises the first administration under former president Mwai Kibaki made when it came to power in 2002 was to bring down interest rates.

Likewise, the Jubilee administration under Uhuru Kenyatta also made cheap loans for borrowers one of its key promises.

But the two approached the task differently. The Jubilee administration appointed a stakeholders committee comprising Treasury mandarins, two Cabinet ministers, Central Bank of Kenya staff and representative from the bankers’ lobby — Kenya Banker’s Association — to come up with recommendations.

Chaired by Treasury secretary Henry Rotich, this task force was dominated by status quo-types, insiders whose inclination was to defend an interest rate regime perpetually characterised by high lending spreads.

Two out of the three Cabinet secretaries in the task force, Mr Adan Mohammed (Industrialisation) and James Macharia (Health), are former long-serving chief executive of major commercial banks.


Critics charged that interests supporting commercial banks had hijacked the task force and predicted that the task force would not come up with any radical solutions to the problem of high lending spreads.

As it was to turn out, the most important recommendation of this task force was the introduction of the much-touted Kenya Bankers Reference Rate which was set by the Monetary Policy Committee this week for the very first time.

Under the new system, banks will also publish an annual percentage rate where they will be forced to disclose their costs.

It was former Finance minister David Mwiraria who spearheaded the battle to bring down the high lending spreads under Mr Kibaki’s first administration. He chose not to go the route of the so called stakeholder committees.

In his first Budget speech, Mr Mwiraria announced a reduction of the cash ratio from 10 per cent to six per cent. This move freed Sh8.1 billion to commercial banks who suddenly found themselves with excess reserves.


The Kibaki regime did not stop at reducing the cash ratio. The government drastically reduced what it was borrowing from the market by either under-issuing Treasury Bills or rejecting expensive bids even where announced auction volumes had not been satisfied.

Interest rates on the 91-Day Treasury Bill tumbled from eight per cent in December 2002 to 1.7 per cent in July 2004.

Unable to lend to the government, commercial banks found themselves stuck with huge reserves in their vaults. This is how banks in this country started to lend money to the ordinary mwananchi through personal loans.

Indeed, until Mr Mwiraria and company came to town — and throughout the regime of former president Daniel arap Moi — commercial banks concentrated on lending money to the government. Which brings me back to the vexing issue of high lending spreads in Kenya.

If the government does not tame its appetite for domestic borrowing, the Kenya Banks Reference Rate or even the Annual Percentage Rate will not work to deliver cheap loans for borrowers.

Bringing down lending spreads is not going to be easy. Institutions and individuals benefitting from the current regime will fight tooth and nail to maintain the status quo. Statistics from a recent World Bank study reveal the following.

First, in terms of return on equity, Kenyan banks, at 29.8 per cent in 2012, performed better than banks in Malaysia (17.5 per cent), Mauritius (18.6 per cent) and South Africa (17.7 per cent).

In terms of return on assets, Kenyan banks at 4.6 per cent in 2012 performed much better than banks in South Africa (1.2 per cent), Mauritius (1.4 per cent) and Malaysia (1.6 per cent).

Interest rate spreads in Kenya at 8.1 per cent were higher than they were in Mauritius (2.5 per cent) and South Africa (3.4 per cent). Profits account for 55 per cent of the spread, while overhead costs account 34 per cent.

A puzzle: large commercial banks with wide branch networks — and are, therefore, able to mobilise deposits cheaply — have much wider lending spreads than small banks.

Let us all welcome the Kenya Banks Reference Rate.