CBK stresses need to lower lending rates

The Central Bank of Kenya (CBK) has challenged banks to move with speed to lower interest rates as a step to restore confidence in the formal financial system.

The ongoing debate on interest rates has seen banks pitted against borrowers who argue that the cost of borrowing remains prohibitive. This comes at a time parliament passed amendments to the Banking Act seeking to cap interest rates at four percent of the central bank rate (CBR).

In an interview with Reuters, the CBK said banks needed to urgently lower lending rates to salvage trust with customers.

“It is urgent that commercial banks lower their interest rates in line with current market conditions and also act immediately to win back the trust of their customers,” the CBK said.

Interest rates have averaged 19 percent in 2016, with the central bank concerned that the rate remains prohibitive.

At the last monetary policy committee (MPC) the CBK maintained the CBR at 10.5 percent but lowered the Kenya banks reference (KBRR) rate to 8.9 percent to pressure banks to cut lending rates.

The banking regulator however maintains the KBRR is an ineffective tool and is currently working on a new loan pricing tool that is likely to force banks to be more transparent in pricing of credit.

Should President Uhuru Kenyatta assent to the bill, interest rates are set to drop to 14.5 percent based on the current CBR.

The Kenya bankers association (KBA) and the central bank have however warned that capping interest rates would force banks to lock out millions of perceived high risk borrowers from accessing credit.

“While appreciating the underlying sentiments about the need to lower the overall cost of credit, we continue to express concern on the adverse consequences of capping interest rates. These would include, inefficiencies in the credit market, credit rationing, promotion of informal lending channels, and undermining the effectiveness of monetary policy transmission,” CBK governor Dr Patrick Njoroge said last week.