Central Bank of Kenya Governor Patrick Njoroge. PHOTO | DIANA NGILA
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Governor Njoroge says large banks are using their size to ride roughshod on customers.
The Central Bank of Kenya (CBK) said it is developing a new formula for setting the minimum lending rate for commercial banks even as it threatens action on big banks for overcharging borrowers.
This came as it admitted to intentionally overriding the current structure in its Wednesday monetary policy decision.
CBK Governor, Patrick Njoroge, said the Monetary Policy Committee (MPC) voted to disregard the formula which would have pushed the standard base lending rate, Kenya Banks Reference Rate (KBRR), to 10.78 per cent from current 9.87 per cent to ensure stability in the money markets.
An increase in KBRR would have resulted in commercial banks raising lending rates.
“The issue is: do you apply it mechanically – which then means that nobody has control over the monetary policy. Our mandate is stability and this (application of the formula) would have led to instability - so all actors voted to hold,” said Mr Njoroge who is also the chairman of the MPC.
Banks have also been ignoring the KBRR framework with the average lending rate rising to 17.4 per cent in December from 15.7 per cent in August despite of the base lending rate having remained steady.
The governor said he was worried by the high interest rates charged by banks, especially the large lenders who enjoy cheap deposits and lower operation costs.
“I think the issue is market dominance – they feel they can throw their weight around because they have a large network and a wide array of services – so they feel comfortable that they do not need to change,” he said in reference to the large banks.
He added that he was open to taking punitive action over the large lenders on dominance rules. Competition Authority of Kenya has previously committed to conduct an audit of the banking sector with an aim of establishing whether the pricing structure was competitive or driven by collusion.
The KBRR formula was introduced two years ago to bring transparency and predictability in the pricing of loans.
It is calculated as an average of Treasury bill rates and the indicative Central Bank rate (CBR). Commercial banks are allowed to load a premium on the KBRR which takes into consideration their cost of deposits and operating expenses.
Concerns have been raised on the formula’s over-reliance on short-term interest rates.
The governor will be meeting with chief executives of all commercial banks today to discuss the formula and the high interest rates.
The CBR was held steady during the MPC meeting at 11.5 per cent.
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