President William Ruto has been a proponent of single-digit lending rates.
At a recent tripartite event involving Safaricom, KCB and NCBA, he reiterated the same call. But it’s not the first time he is making the push for single-digit lending rates.
In 2013, then as the Deputy President, he asked the National Treasury to explore ways of deepening private sector credit and mortgage finance penetration in Kenya. As a result, the Treasury constituted and chaired a Cost of Credit Committee.
As part of the recommendations by the committee, a new loan pricing formula, known as Kenya Banks’ Reference Rate plus a “K” (or KBRR+K) was developed and became effective in July 2014. The KBRR was computed as an average of the Central Bank Rate (CBR) and the weighted two-month moving average of the 91-day Treasury bill rates and was to be reviewed and announced by the Central Bank of Kenya (CBK) after every six months through Monetary Policy Committee (MPC) releases.
The ‘K’ was a premium to be loaded onto the reference rate and was dependent on several factors, including banks’ cost of doing business (non-funding costs), funding costs and borrower risk profile.
Consequently, the central bank, in its July 2014 MPC meeting, set the KBRR at 9.13 percent for six months and all loans that were priced off the formula had a year to be repriced within the framework.
There was a background to this push though. For the longest time, bank lending rates in Kenya remain a rather emotive issue. The general perception has been of banks supposedly behaving like cartels (by charging exorbitant rates).
There had been two previous unsuccessful attempts to control the pricing of loans in Kenya.
First was the famous Joe Donde Bill, which was rejected by the presidency on New Year’s Day in 2001.
Second was the 2012 Finance Bill that, among other things, had sought to regulate lending rates by introducing caps. The Bill was presented in Parliament and voted against by the majority of members.
All these two failed attempts had sought to introduce a cap on lending rates and a floor on deposit rates. The KBRR framework sought not to regulate the pricing of loans but rather meant to drive a transparency agenda. Commercial banks price their loans using a Base Rate whose formula varies from one bank to another. And apart from enhancing transparency in pricing, KBRR was also meant to standardise Base Rate setting by being the only single reference base rate in the industry.
The pricing framework did not achieve much success for a couple of reasons. First, the loan market is institutional-led, meaning a significant number of borrowers are either corporate or mid-sized businesses that enjoy some level of discounting. This effectively implied that only under half of the outstanding credit facilities were affected by the pricing formula, a development that could not deliver the needed psychological influence for the market to adjust downwards.
Second, Kenya, just like many of its sub-Saharan Africa (SSA) peers, remains an exchange-rate-driven economy rather than interest-rate-driven. And finally, the lack of policy alignment between the fiscal and monetary policies played a part in the lack of success. Eventually, the KBRR+K formula had to be abandoned when interest rate caps became effective in late September 2016.
Nonetheless, the President’s renewed push now targets credit referencing and speaks to the broader risk-pricing debate. In simple terms, credit scoring and referencing is a pricing tool and not a death knell. The problem might not lie in credit reference bureaus but rather in how commercial banks use the referencing. For the moment, it appears that banks are only interested in Boolean referencing, which simply answers the question of whether a borrower is good or bad (ignoring or leaving behind a much richer and exhaustive set of data about a borrower).
Broadly, scores speak to the behaviour of a borrower, based on borrowing and repayment history.
The risky the behaviour, the higher the price. Whatever the case, the die has been cast and the era of 20 percent plus lending rates may be gone. Banking will now henceforth be a volumisation game rather than a margin play.
The writer is an investment analyst. @GeorgeBodo