Central Bank cuts CBR rate to ease credit squeeze

By Jackson okoth

Central Bank of Kenya (CBK) has renewed its pressure on commercial banks to reduce lending rates, amid concerns that the economic recovery is still feeble and needs affordable credit to support it.

In its second meeting this year, the Monetary Policy Committee (MPC), a top policy organ of the CBK, lowered the Central Bank Rate (CBR) from 7 per cent to 6.75 per cent, putting more pressure on banks to cut lending rates.

"There has been a lag in the transmission of the CBR signal, due to the short-term nature of lending done by most banks," Prof Njuguna Ndung’u, the CBK Governor, told reporters at a press briefing on Thursday.

All previous attempts by CBK to encourage banks to ease lending rates have so far met with a muted response.

But even with this policy move, there are all indications that it will take a while before the market responds to the CBR signal.

"It will take a while before lending rates come down because there are structural problems that must be addressed first," said John Wanyela, Executive Director, Kenya Bankers Association (KBA).

Lenders cite high cost of collateral, aggressive borrowing by the Government from the domestic money market and the slow court processes, as some of the reasons for the high cost of credit.

"We are charging customers a premium for loans because we are not able to ascertain their ability to repay," said Wanyela.

With large commercial banks running huge overheads, there is reluctance to narrow the widening spreads between lending and deposit rates, currently at more than 10 per cent.

aggresive sales

Incidentally, commercial banks have resumed an aggressive sales campaign, setting up makeshift tents on street pavements to attract new customers.

While CBK has been using CBR as a signal for banks to lower the price of loans, commercial banks have continued to ignore the instrument.

Average lending rates charged by commercial banks stand at 14.98 per cent, considered too expensive for cash-strapped borrowers.

"The lowering of lending rates will happen, although this might not be as immediate as the market expects. There are funds with long-term commitments, and this prevents banks from cutting down rates immediately," Tony Okpanachi, Managing Director, Ecobank Kenya told Standard.

Commercial Banks have been reluctant to lower lending rates, mentioning that cost of funds must drop before the price of loans can also move in that direction.

The MPC committee notes that cost of funds and credit risk are major constraints to supply of credit.

"The cost of credit is still seen to be dampening the expansion of the critically important private sector loans," says the committee.

While affordable credit remains scarce, there concerns remain that delays in implementation of the fiscal stimulus package could further slow down recovery of the economy.

After the global financial crisis, local banks have become more risk averse and reluctant to revise their lending rates downwards.