Kenya’s commercial banks are wavering on the directive to reduce interest rates despite Central Bank Governor Dr Patrick Njoroge requiring them to act in “weeks.”

A cocktail of factors stand in the way of borrowers hoping to enjoy low rates on loan products, including a new policy framework that allows banks to review their rates in at least seven months (once in a year).

Kenya introduced a uniform base rate regime with hopes of enhancing transparency in the pricing of loans, but the Kenya Banks’ Reference Rate (KBRR) framework has given lenders a window in which to adjust their lending rates in response to the uniform rate, which is modified every six months.

KBRR, which currently stands at 9.87 per cent, was last adjusted in July and the next review is expected in January next year.

Once adjusted, banks have to issue a one-month notice to their customers informing them of their intention to review their lending rates.

But there are also concerns that  the two variables used to develop KBRR— the Central Bank Rate (CBR) and the 91-day T-bill rate — may not be fully representative of the business environment, including the cost of deposits which is one of the key determinants of the cost of credit. In addition, the delay in the transmission mechanism between the time when CBR and KBRR are adjusted means the impact on lending rates is not really felt in the economy.

KBRR is adjusted every six months while Central Bank’s Monetary Policy Committee (MPC) sits every two months to review the developments in the macroeconomic environment, and take appropriate action by reviewing the CBR — the benchmark lending rate to commercial banks.

Under the KBRR framework, lenders are required to reveal and explain to their customers the effective base rate (KBRR) and any additional costs (K) above the base rate.

However, while CBK has control over KBRR, the regulator has no control on the additional costs loaded by commercial banks, including the overhead costs, risk premiums and profit margins.

“I think what commercial banks have done so far is to frontload the entire balance of risk premiums into K, since KBRR, as currently formulated, tends to underprice business risks (especially the wide swings in cost of balance sheet funding),” said George Bodo, head of banking research at Ecobank Capital Ltd.

As a result, the KBRR framework has come under sharp criticism with both the CBK and market analysts pouring cold water on its effectiveness in lowering lending rates.
“Since KBRR was introduced, the CBR has either remained flat or gone up; in such circumstances it is difficult to assess the impact it has had on lowering lending rates,” said Francis Mwangi, head of research at Standard Investment Bank.

Last week, CBK retained its policy rate at 11.5 per cent, citing improvement in the cash position of commercial banks in November, with the rate on the 91-Day Treasury Bill falling to as low as 9.65 per cent from a high of 23 per cent in October. This is after the government opted to reduce borrowing from the domestic market in favour of a syndicated loan of $750 million from foreign lenders.

What CEOs said

However, a cross-section of chief executives of commercial banks polled by The EastAfrican said they are still stuck with expensive deposits in their books and lowering lending rates may not be possible until the KBRR is adjusted.

Most banks have entered into 3-6 month deposit contracts with their clients, paying a fixed rate of interest averaging as high as 20 per cent depending on the volumes involved, according to industry insiders.

“It is not possible for interest rates to come down sharply. We are stuck with expensive deposits. This is a big problem in the industry,” said a CEO of a bank who asked not to be named.

Another CEO said: “The CBK does not have control over our costs. For us it would become difficult to lower the rates now because we will make losses.”

Last month, many lenders served customers with 30-day notices increasing lending rates, with some borrowers having to contend with rates as high as 30 per cent occasioned by the government’s heavy borrowing from the local market.

READ: Anguish as Kenya banks raise interest rates

Attempts by the banking regulator to name and shame expensive banks by publishing the rates they charge every month failed to yield fruits since the programme was not anchored in the law and many banks resisted the move.

KBRR was introduced in July last year as a common credit pricing benchmark whose value is determined by computing the average of the CBR and the two-month weighted average of the 91-Day Treasury bill rate.

During the first half of this year, CBK changed its monetary policy stance by increasing the CBR from 8.5 per cent in May to 10 per cent in June and further to 11.5 per cent in July.

As a result, KBRR which had initially been set at 9.13 per cent at inception, was also adjusted to 9.87 per cent in July from 8.54 per cent in January.

Latest data from CBK shows that the value of gross non-performing loans (NPLs) increased by 0.7 per cent from Ksh123.9 billion ($1.19 billion) in June to Ksh124.8 billion ($1.2 billion) in September, while the quality of assets, measured as a proportion of net non-performing loans to gross loans, slightly decreased from 2.7 per cent to 2.5 per cent over the same period.

Financial services and energy and water sectors experienced the highest NPLs at 11.5 per cent and 11.6 per cent respectively.