Ideas & Debate

Cartels and red herrings in rate capping drama

cbk

The Central Bank of Kenya. FILE PHOTO | NMG

The Treasury Cabinet Secretary has stoked the raging fires of the interest rate debate through his proposal to remove interest rate caps in the June 2018 Finance Bill.

But the CS is nobody’s fool. The groundwork for that Herculean effort was laid in advance through the publishing of the draft Financial Markets Conduct (FMC) Bill a few weeks earlier in May 2018.

The Bill proposes the setting up of yet another regulator with three bodyguards to oversee the labyrinthine world of retail lending.

The draft FMC Bill is, in my very humble opinion, a likely red herring particularly in light of its suspicious timing.

A quick glance through the Bill illustrates what seems to be a well detailed process map of how the enforcement mandate of the existing financial regulator — the Central Bank of Kenya (CBK) — should be executed.

All these rules are simply functions that can and should be undertaken by the CBK by increasing its mandate to regulate financial service providers that fall outside the purview of the Banking Act.

Then we get to the hot potato: section 87 of the draft Bill which states that a lender shall not charge or recover or attempt to charge or recover from the borrower or a guarantor any amount on account of interest under the contract that exceeds the maximum rates as may be prescribed by the authority from time to time.

There you have it folks, the problem of interest rate pricing has been “fixed”, “repaired” and “subdued”. Via an entity that has three bodyguards in the form of a Financial Sector Ombudsman, a Conduct Compensation Fund Board and a Financial Services Tribunal, the latter which spreads the joy to the Judiciary to get a bite of the (financial misconduct) cherry.

If there is one thing we are good at in this sun-kissed country it is throwing (more expensive) bodies at a problem in an often misguided attempt to cure the symptoms rather than the disease.

In 2003 I was working in the banking industry and watched with much trepidation as the Kibaki administration resolutely brought down the treasury bill rate to below one per cent.

I say this because I was a corporate banker and our big ticket clients who consisted of multinationals and top tier local corporates had most of their working capital lines benchmarked off of the 91-day treasury bill rate rather than the base rate.

To protect our profit, we set an absolute floor of six per cent. Regardless of how much lower the T-bill trended we would not lend at anything below six per cent plus the credit risk margin.

There’s not enough space here to write about the fact that the opportunity cost of funds was shrinking faster than we had time to re-calibrate the cost of lending out those funds with a sluggish, clunky banking operation in the backdrop.

The monetary policy of the administration also caused the CBK cash reserve ratio to drop from 10 per cent to six per cent meaning that all of a sudden banks were flush with liquidity to lend out and spur the economy.

READ: CEOs favour rate cap, fresh survey reveals

Consequently, banks had no excuses to keep high lending interest rates which had historically been above 20 per cent and base rates came down not to the single digits they deserved to be technically, but in the 12-15 per cent range.

Again, operational inefficiencies at the time would not permit such a drastic drop in profit making. The point is interest rates dropped primarily because the government wanted them to drop.

Not by legislative chest thumping. But by the use of wider, macroeconomic, big thinking initiatives. The banks were hurt then, but it was back in the day of brick and mortar operations.

In an increasingly digital world, banks can adjust their operational models faster if a similar monetary policy position were taken.

Lastly, to the chest thumpers: In December 2011, the Parliamentary Budget Office published a concise paper titled High Interest Rates and the Risks to Economic Growth.

It’s only nine well researched pages of what makes interest rates rise and fall with a keen eye placed on the low interest rate regime prevailing in Kenya between 2003 and 2011, as well as the subsequent linkage to bank lending. Before spewing vile invectives at the Treasury and the banking industry, it would do well to take it off the parliamentary library shelves, gently blow off the dust and read it.

Then engage in an intellectual rather than an emotional debate. And please remember to leave the word “cartel” at home.