Kenyan banks must lower rates – governor
KENYAN banks needed to lower their “remarkably high” interest rates and to make a “credible down payment” to borrowers, central bank governor Patrick Njoroge said.
While a proposed law limiting how much the lenders could charge for loans was misguided, banks still needed to do more to cut their rates so the benefits of a well-functioning financial system reached customers, he said.
Legislators in the $61 billion (R854bn) economy on July 28 approved a new regulation that capped commercial interest rates at 400 basis points above the central bank’s benchmark rate, currently at 10.5 percent. The move has unnerved the industry, which has warned interest rate limits will dry up credit and encourage unregulated lending.
The central bank “has asked banks to make a credible ‘down payment’ to their customers, thereby allowing the reforms underway to take root and sustainably reduce the cost of credit”, Njoroge said. “Appropriate responses by banks require courage and hope for the future, not mistrust and caution.”
While the central bank has reduced its key policy rate by 100 basis points in the last 12 months, the average commercial lending rate has increased to 18.2 percent from in July last year.
The spread between borrowing and deposit rates, at 11.4 percent, was high, Njoroge said.
Reforms were underway, such as improving the credit reference system, establishing a collateral registry and implementing an annual percentage rate that reflected the actual cost of borrowing.
Banks raised lending rates quickly in response to market conditions, but were slow to reduce them when the environment improved, Njoroge said, adding that there were concerns about non-interest charges that concealed the real pricing of loans and other bank products.
Reforms
15.8 percent President Uhuru Kenyatta had yet to sign the proposed legislation into law and had said he would consult “extensively” before making a decision. The nation’s main opposition party, the Coalition for Reforms and Democracy, urged Kenyatta to assent to the law.
Reinstating interest rate controls that were abolished in 1991 would hurt business and individuals, the central bank governor said. “This is the time to pause and adjust course. We cannot afford a collision, the cost of which would be borne… by the most vulnerable.” – Bloomberg