The gap between commercial banks’ lending rate and deposit rate narrowed to 5.3 percentage points in January this year on a faster rise in returns paid to savers, narrowing the lenders’ margins.
Data from the Central Bank of Kenya (CBK) reveals that banks on average offered depositors a return of 7.47 percent on their cash as they disbursed credit at an average of 12.77 percent.
The reduced margins between the two rates mean that commercial banks’ net interest income on customer loans falls as they eat deeper into their interest income to service the interest expense.
Competition on returns from different asset classes coupled with relatively high inflation has been pushing lenders to increase returns on deposits to encourage savings and increase liquidity in the banking space.
“The rising rates on government debt securities are forcing banks to return on large-scale deposits from cash-rich firms and high-net-worth investors like pension schemes,” said a banking sector analyst.
This rise in deposit rates ultimately increases the pressure on lending rates because deposits from large savers influence the pricing of loans.
This is due to the opportunity cost of lending. Banks have had to balance between lending to the government and to households and individuals and have attached a higher risk to private sector lending.
The average lending rate increased by 0.1 percentage points to hit a 53-month high of 12.7 percent the slower growth is attributed to low approvals of risk-based loan pricing.
The consecutive rise in lending rates has been a reactionary move by banks as the regulator raised the benchmark rate to 7.5 percent in May last year which has been unchanged for 25 months.
In November CBK revised the base lending rate for the third in a year to the current 8.75 percent to fight inflation that has failed to go below the nine percent mark since September last year.
Despite interest on deposits hitting a 52-month high, the returns still trail other investment classes such as T-bills and bonds and land in selected satellite towns.
