Greedy lenders to blame for feared hike on bank loan rates

The interest rate charged on your new loan is inevitably set to rise in the aftermath of the interest rate cap repeal in spite of assurances from the banking sector.

The expected hike in rates could be highly blamed on greed by commercial banks with the effective market lending rate by the lenders tied to the State’s fiscal management behavior.

However, in weeks since the rate cap repeal, several commercial banks have come forward to assure of a stay to old rates on new loans even as the pricing of credit going forward remains shrouded in doubt.

“The fear that banks will become unreasonable is unfounded. They don’t have that chance because pricing for banks is not something you wake up and throw a dice on,” Kenya Bankers Association (KBA) Chairman Joshua Oigara told a news conference on November 6.

KCB has already tipped its new interest rates to stay within a two to three percent band saying they have found a ‘new equilibrium’ to their operating model.

Betrayal?

Last weekend, Sidian Bank was the subject of online bashing as a copy of new and higher interest rates surfaced on the inter-webs.

Effectively tagged as the Kenya’s greediest bank, the lender would later renounce the new rates and pronounce a hold to interest charges in a board notice issued on November 10.

Even so, the leak may have reflected honesty by the bank in its mirroring of the pricing in of the previously locked out client base.

Economist Tony Watima reckons banks are yet to embrace transparency in new loan pricing arguing high risks clients have only gotten riskier in the aftermath of the entry of caps as the downturn in economic growth weighs hard on both individuals and firms.

“The reality is more people have a higher risk profile than before. The current risk profile cannot be lower and as such we are lying to ourselves,” he said.

“We have not solved the problem that was the before on transparency in pricing and as such I’m not sure how banks will handle that”

The very shallow clarity on loan pricing triggered the very entry of interest rate caps as some banks charged rates as high as 26 percent against an industry average 18 percent.

The Central Bank of Kenya (CBK) attempts to tame the discrepancy through the introduction of the Kenya Banker’s Reference Rate (KBRR) in July 2014 failed to gather steam throwing Kenyans back into the dark.

Cognizant of the pitfalls, a number of bank’s Chief Executive Officers have refused to be dragged into the mud on the setting of new rates to largely hint at a wait and see approach to upward adjustments.

“We can have that conversation in June. It’s a premature conversation for now. We need a coherent story on both the monetary and fiscal side. We need to look at what’s below the tip of the iceberg,” said Equity Group Managing Director James Mwangi.

“The measure of success on the repeal cannot be rates going up, otherwise we would not have done away with it. The measure has to be more businesses getting to credit,” NCBA Managing Director John Gachora said.

Government borrowing

Meanwhile, the continued appetite for domestic borrowing by the government represents an even greater risk to higher bank interest rates.

This is as the repeal of interest rates presents new competition for government funding to point to higher returns to investors from the purchase of bonds.

“Your bank interest rate is essentially an adjustment from the charge pegged on the risk-free government bonds. If this rate goes up, the effective lending rate increases too. The margin on high risk clients such as SMEs will be wider,” AIB Capital Head of Research Sarah Wanga said.

While Treasury has previously sought to exit the local borrowing market, recent adjustments to budget financing increased domestic borrowing by 1.5 percent to Ksh.429.4 billion to point more internal borrowing.

Moreover, the Kenya Revenue Authority (KRA) missed its expected collection for the first quarter of the 2019/20 financial year by over Ksh.80 billion to hint at more local borrowing with Treasury holding the easy card of tapping onto the domestic market to fund the deficit.

The yield on the 364 day paper has been on the rise since September confirming the jitters of higher interest rates in the long run.

CBR

The CBK is expected to make its bi-monthly pronouncement on monetary policy on Nov 25 setting the bar on future interest by commercial banks.

With its recapture of the policy setting role in the aftermath of the rate cap repeal, the reserve bank now holds the prerogative of determining the movement of interest rates in either direction.

The continued stay of inflation within the 2.5 to 7.5 percent prescribed band and a stable forex exchange coupled with the need to grow private sector credit supports a cut to the Central Bank Rate (CBR) which would effectively see interest rates fall from current rates.

Even so, the CBK is largely expected to hold its base lending rate for the 18^th straight month as it takes up a wait and see policy.

“It’s too soon to make any abrupt monetary policy decisions and the policy makers might want to monitor developments following the repeal of the interest capping law,” noted researchers from Sterling Capital.

CBK has held back against making any hard-line stances on interest rates so far, choosing to instead underline the stakes at play.

“We must satisfactory respond to the questions at the very top of every Kenyan mind and ask ourselves what will be different this time. We must not fail Kenyans as it is them that the banking sector owes its existence,” CBK Governor Patrick Njoroge told banks on Friday.