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Team set to probe high interest rate regime in Kenya

National Treasury Principal Secretary Dr Kamau Thugge

National Treasury Principal Secretary Dr Kamau Thugge

The Treasury has disbanded a committee formed by the Central Bank to investigate high interest rates in Kenya in favour of a more inclusive one.

In a telephone interview on Thursday, Treasury cabinet secretary Henry Rotich said in addition to his ministry, the team draws membership from the Central Bank, the private sector and the Kenya Bankers Association.

The Central Bank had initially established its own committee with a similar mandate but one said to have been skewed to bankers. However, this has now been absorbed into the coordinated effort by the Treasury.

“The Central Bank is now going to feed into the bigger coordinated committee by the Treasury. CBK’s committee was internal and it could not resolve all the issues that may arise,” said Mr Rotich.

The team will be mandated with rooting out the cause of Kenya’s wide interest rate spreads — the difference between interest earned on deposits and interest charged on loans.

“It will decompose cost components in the lending market, compare the situation with other countries and come up with recommendations,” said Mr Rotich.

HIGH CREDIT COST
The committee will present actionable recommendations mid next month.

President Uhuru Kenyatta and his deputy raised concerns on the high cost of credit in the country last year and asked the CBK and the Treasury to investigate.

In 2012, Kenya’s average industry interest rate spread was 11.8 percentage points up from 11.3 percentage points in 2011. CBK data shows that in November last year, the average lending rate was 16.89 per cent against an average deposit rate of 6.61 per cent.

Interest rate spreads usually reflect the high risk banks attach to borrowers and inefficiencies in the market.

Initial analysis by the Treasury has indicated that the possibility of drawn out cases between lenders and creditors in the event of default and the slow rate of land reforms in Kenya could be fuelling the sky-high interest rates.

Further, lack of credit information on potential customers also poses challenges. In Kenya, two private credit bureaus have data on about 4.1 per cent of borrowers.

Contrast this with Rwanda where 15 per cent of customers have been profiled by credit bureaus.

Analysing CBK data in a report last year, the World Bank noted that profit was the largest contributor to interest rate spreads accounting for 5.6 percentage points.

This could be attributed to the fact that Kenyan banks rely heavily on loan income for revenue. Overheads came second contributing 4.7 percentage points to the average interest rate spread in the country.

“This perception of high spreads and growing profitability has left the industry open to repeated criticisms of collusive price-setting behaviour,” wrote the World Bank.

INVESTIGATIONS
Without sufficient information, the World Bank pointed out, it is difficult to determine optimal interest rate spreads.

It also warned that the high cost of credit “may be restraining the growth of SMEs” in Kenya.

Given that across Africa small businesses contribute between 32 per cent and 60 per cent of Gross Domestic product (GDP), this has potential implications on economic growth.

In an interesting phenomenon, the high cost of credit for SMEs remains despite the fact that Kenyan banks have been increasingly lending to this segment.

The World Bank notes that Kenyan banks lend to SMEs more than their Rwandan, South African, Tanzanian and Nigerian counterparts.

Allegations of price collusion in interest rates have also caught the attention of the Competition Authority of Kenya.

The antitrust watchdog is investigating the banking industry to ascertain whether anti-competitive behaviour could be at the root of high interest rates.

The Treasury has indicated that, in the long-term, high interest rates will be addressed by a proposed law that will overhaul governance at the CBK.

WAY FORWARD

The proposed CBK Bill set to be tabled in Parliament next month is expected to synchronise the current banking regulatory regime with international standards.

This is not the first push in Kenya for regulators to rein in bankers. In 2001, a proposed law that later came to be known as the Donde Bill was introduced.

Although it was passed by MPs, the Bill, which introduced maximum interest rates on loans and minimum deposit rates, was later challenged in court by bankers.

A decade later, Gem legislator Jakoyo Midiwo proposed a maximum cap on interest rates at no more than four per cent of the CBK’s base lending rate.

Mr Midiwo was responding to a jump in interest rates in the country following macroeconomic turbulence. However, the Treasury opposed the law and convinced legislators that it would go against the concept of a free market.

Kenya is trying to position itself as a regional financial hub and restrictive regulations on the banking sector could slow down this journey.

-Nation

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