- Regulator does not want to use big stick to force lower rates
- Commercial banks may have no incentive to lend, CBA says
The Central Bank of Kenya’s reduction of the benchmark rate used by lenders to set borrowing costs may have caught commercial banks by surprise but they may find ways to dodge lowering lending rates.
"Which bank would want to lend at a lower rate, taking more risk for lower returns?” Faith Atiti, a research analyst at Commercial Bank of Africa Ltd., said by phone from Nairobi. Banks will probably increase premiums and introduce other fees, which will mean that the “overall cost of loans won’t necessarily come down," she said.
Governor Patrick Njoroge cut the Kenyan Banks’ Reference Rate, known as the KBRR, to 8.9 percent on Monday from 9.87 percent. The Monetary Policy Committee kept its main lending rate unchanged at 10.5 percent on rising inflation and concerns Britain’s exit from the European Union may trigger capital flight from Kenya.
Kenya’s financial authorities have repeatedly asked commercial lenders to reduce their loan charges to stimulate demand for credit in a country where central bank data show only 4.4 percent of the population have a formal bank loan and 1.2 percent of people use a credit card.
While banks have expected changes to the KBRR, these should be in line with market rates, Atiti said. Yields on the country’s 182-day Treasury bills rose to 10.2 percent at an auction on July 20, from 9.91 percent a week earlier. Banks lent at a weighted average rate of 18.25 percent in May, according to the most recent central bank statistics.
“Credibility and predictability help maintain market stability” she said. “Such surprise decisions catch the market off guard. For banks, they have to somewhat fumble.”
The central bank is working on a new system to replace the KBRR, Njoroge said, adding that lenders will have 30 days to adjust their rates after Monday’s reduction.
With little room to move on the main benchmark rate, Njoroge’s monetary policy team had to fall back on adjusting the KBRR as means of lowering borrowing costs in the economy, said Jacques Nel, a senior economist at Paarl, South Africa based NKC African Economics. Lowering the KBRR will put pressure on commercial banks to cut lending rates, he said.
"Not too many banks are willing to to go head to head with regulator,” Njoroge said. “Banks will understand that there are certain costs they may have to carry for not observing the rules."