The Central Bank of Kenya (CBK) has summoned bank chief executives to address concerns that lending interest rates have failed to respond to benchmark rate cuts, delaying relief for borrowers suffering from costly debt.
Top bankers at KCB, Equity, Cooperative Bank, NCBA, I&M, Absa, Standard Chartered and DTB are expected to attend a meeting at the central bank on an undisclosed date amid allegations the banks are profiting from high levels of debt.
The CBK on October 8 lowered its benchmark interest rate by 75 basis points to 12 percent – the biggest cut since the start of the Covid-19 economic crisis in March 2020
This followed the standard rate by 25 basis points in August to 12.75 percent, analysts who estimate that it still does not reflect the level of lending when the demand for credit has decreased to the level seen in 2017.
CBK Governor Kamau Thugge and the executive plan to discuss how to reduce debt levels due to pressure from President William Ruto and Treasury Cabinet Secretary John Mbadi.
The reduction in borrowing rates will reduce rising lending standards and stimulate demand for loans which will put money in consumers’ pockets and create more orders for goods and services in Kenyan companies.
“We have agreed with the commercial banks that we will have a meeting to brainstorm to ensure that with inflation and the low CBR (Central Bank Rate), banks extend lower interest rates to borrowers,” Dr Thugge said on Wednesday at a banking conference. hosted by the Kenya Bankers Association (KBA) – the industry lobby.
“With inflation continuing to fall and CBK easing monetary policy there is really no reason not to have lower interest rates by commercial banks.”
Inflation fell to its lowest level since December 2012 at 3.6 percent and kept the cost of living within the government’s target of between 2.5 percent and 7.5 percent in the medium term.
This has offered CBK room to reduce the benchmark rate or CBR.
The drop in the CBR is expected to lead to lower borrowing costs for households and companies that have struggled to service expensive credit since the CBK began raising rates in June 2022 amid global economic shocks that have seen inflation rise for years.
However, the average credit rate of commercial banks rose slightly in August by 0.1 percentage point in August to hit 16.78 percent, defying the CBK signal to fall in loan costs after the benchmark rate has been cut for the first time in four years.
Credit demand fell 1.3 percent in August compared to a 3.7 percent increase in July – the lowest since 2017 when Kenya introduced lending rate controls that reduced supply for loans.
CBK considers credit growth of 12 to 15 percent sufficient to support healthy economic growth.
The high cost of borrowing has caused borrowers to not follow through on loans in an economic climate where demand for products has slowed, causing companies to freeze hiring and expansion plans.
The decrease in borrowing costs is expected to lead to consumers taking funds for investment and consumption in the coming months, increasing economic activity.
“Lending to the private sector is one of the tasks I want you (banks) to do. Credit to the private sector only increased by 1.3 percent in August which is insignificant,” President Ruto said at a conference of bankers.
“We want the private sector to do more and understand what the public sector needs to do. We will do our part, you do your part.
Top bankers, including KCB chief executive Paul Russo, Kenya Stanbic Bank’s Joshua Oigara, NCBA’s John Gachora, and Kenya’s Abdi Mohamed Absa, were at the conference.
KBA considers that it will take time for policy rates to be delivered to the market.
Cheap credit can also help banks easily manage their growing stock of non-performing loans (NPLs) due to expensive credit and Kenya’s soft economy.
This has left many distressed borrowers whose assets, from homes to cars and furniture, have been seized by aggressive banks.
Data from the Central Bank of Kenya (CBK) showed that NPLs hit a record Sh674.9 billion in August from Sh657.6 billion in July and Sh621.3 billion at the start of the year.
The share of NPL in the banking industry rose to 16.7 percent in August, the central bank said, remaining in double digits for the month and at the level last seen in April 2006.
“While there is an increase in the number of properties being auctioned, there is a corresponding shortage of assets. In fact, the absorption is at its lowest in history. Joseph Gikonyo, chief executive of Garam Auctioneers, said.
Before cutting the CBR in August, the CBK’s monetary policy committee had raised rates by 5.5 percentage points from the tightening period starting in May 2022 to July 2024 to manage inflation expectations by keeping borrowing costs up.
