Analysts predict steady interest rates

July 31, 2008

, NAIROBI, July 31 – Financial analysts have predicted that lending interest rates will rise marginally, but say that this might not significantly affect the economy.

Ochieng Oloo the CEO of Think Business, a banking market surveyor, told Capital Business Thursday that banks were likely to keep small margins to avoid discouraging borrowers who would like to apply for loans, a move that would ultimately hurt their profitability.

“Interest rates are like a double-edged sword because when they are high then it means that banks would pay the depositors more and at the same time charge more for loans advanced,” he explained.

This is because when banks increase their rates on loans, the probability of ending on a lower growth path increases.

The last few weeks have seen several banks increase their rates citing the high inflation and the tight liquidity in the market, occasioned by short term interruptions created by the recently concluded Safaricom IPO.

The Commercial Bank of Africa and Standard Chartered Bank have raised their lending rates as their colleagues await direction from the Central Bank of Kenya (CBK).

The CBK marginally increased the Central Bank Rate (CBR) from 8.75 percent to 9 percent in April, shattering hopes that it would take any drastic action.

Commercial banks had been pressuring the CBK to raise its interest rate on Treasury Bills and Bonds to match the high inflation rates, a call which the regulator refused to heed, arguing that the all time high inflation of 31.5 percent in May 2008 was driven by a shortage of food and therefore did not affect the banks.

Inflationary pressures have eased in the past two months to 26.5 percent in July.

Oloo noted that borrowers were also likely to get reprieve from dipping international oil prices, which are projected to touch a low of $90 per barrel.

Crude oil prices have fallen from an all time high of $149 per barrel to the current $126 in less than 10 days.

Oloo spoke during the release of the 2008 banking survey that rated Equity Bank as tops in the country.

Equity, which was last year in the fourth position overtook Citibank and Standard Chartered Bank to clinch the number one spot.

The survey rates the financial performance of banks using ten parameters such as return on capital, liquidity level and the total assets of an institution.

The findings show that the banking sector recorded, on average, 158 percent in profits before tax in the last five years.

Citing the phenomenal half-year results that were released by several banks such as Equity Bank and Kenya Commercial Bank (KCB) Group in the last few days, Oloo predicted that the industry would continue to post good performance in the next few years.

He explained that the half-year results for the entire industry were better than those posted in the same period last year, despite the political turmoil in the first quarter of the year.

“The Safaricom IPO and the lending that followed during the issue, negated the effects of the post election violence,” he added.

Oloo predicted that the banking sector would continue to post good performance in the next few years.

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