Commercial banks want the Central Bank of Kenya (CBK) to deliver a major rate cut, anchoring a faster decline in loan rates.
The Kenya Bankers Association (KBA), the industry’s lobby, argues inflation has remained below the five per cent midpoint while the macroeconomic environment remains resilient leaving the window open for additional rate cuts.
The KBA further decries challenges in the credit markets with private sector credit growth falling to near zero in October.
“In view of these developments, and the need to reverse the decline in private sector credit growth, we argue for a further cut in the Central Bank Rate (CBR) to provide a stronger signal to the market for lending rates to decline,” KBA said in a note.
The CBK began cutting its benchmark lending rate in August when it lowered it from 13 percent to 12.75 percent after a drop in inflation and the establishment of exchange rate stability.
The apex bank followed up the move with a larger rate cut in October when it lowered CBR to 12 percent from 12.75 percent with the goal of driving down commercial bank interest rates.
Interest rates on bank loans have nevertheless remained sticky with 17 out of 38 commercial banks increasing their average weighted rates on loan in October despite the expectation for a decline in the lending rates.
The KBA has signalled structural rigidities constraining a faster decline in interest rates including higher loan impairments and tighter liquidity in the banking system.
“Faced with tighter liquidity and heightened default risks in the private sector, banks tightened lending standards to avert a further deterioration in asset quality, prioritising investments in less risky assets such as government securities. Consequently, bank lending to the private sector growth declined to 0.4 percent and near zero in October,” said KBA.
Commercial banks have listed three drivers to the industry’s asset quality deterioration including high cost of funds as high-yielding government securities drive competition for customer deposits, government pending bills and decreased disposable incomes.
A lower benchmark lending rate is expected to cut not just commercial bank interest rates but also yields on government securities including Treasury bills and bonds.
The Central Bank and the National Treasury have piled pressure on commercial banks to cut interest rates on loans as the authorities also seek a revitalisation of private sector lending to boost economic activity.
