Banks must heed call and cut interest rates

Consumers in Kenya have grown accustomed to the fact that major players in the goods and services industry are very swift to jerk up prices when costs go up but exceedingly reluctant to similarly reduce them when the converse happens.

In recent weeks, the banks have displayed great speed in revising upwards the lending rates to their customers and many have issued notices to borrowers that rates would go up by up to seven per cent.

The basis of their decision was plain for all to see.

The sharp rise in the rates of government securities meant that lenders would gravitate towards lending to Treasury rather than to smaller borrowers who essentially expose the banks to greater risks.

Yet the basis for the rate rises no longer exists.

As became clear at the end of the week, the 182-day Treasury-bill rate in the latest auction declined by 4.21 percentage points to stand at 12.282 per cent while the 364-day paper was down by 3.51 percentage points to 13.62 per cent.

The shorter-term three-month or 91-day government paper has experienced two weeks of consecutive falls to stand at 13.8 per cent.

The Central Bank Governor is, therefore, right to tell the banks to recall the notices they had issued to borrowers which threatened to send many of them into distress.

Sharp rate rises can have a devastating effect especially on small businesses and on families.

As we report in this edition, the rate at which borrowers are being auctioned has risen significantly since last year.

Those with mortgages, in particular, are usually hard hit by sharp rate rises which often naturally don’t take account of the huge spread between what banks offer for deposits and the amount they demand to lend the same money.

Government can exercise some leverage by denying business to those banks which offer particularly steep rates to borrowers.

Also, while officials at CBK and Treasury deserve commendation for their swift action to bring rates down, the long-term solution must be structural.

More value addition of local goods to reduce the amount of imports and create a bigger local manufacturing base will limit the country’s exposure to the constant need to resort to far-reaching measures to save the shilling including rate rises.