Banks warned against hiking lending rates

November 1, 2011

, NAIROBI, Kenya, Nov 1- As the market awaits another possible hike in the base lending rate once the Monetary Policy Committee (MPC) meets on Tuesday, focus will now shift to commercial banks to see whether they will pass on the increase to consumers.

Independent Market Analyst Aly-Khan Satchu faults banks for being too quick to re-price their interest rates after last month’s four percent rise in the Central Bank Rate (CBR) to 11 percent, saying it will slow down the cost of credit to the private sector and eventually affect the economy.

“The banks should have held back a little bit simply because they have made a great deal of money and it’s a customer business after all. I think, they have been too trigger-happy but they should have taken a bit of the pain in order to protect the customers but that has not been happening,” regretted the analyst.

Following the October 5 move to raise CBR by 400 basis points, a move that was termed as ‘painful’ but ‘necessary’, it was not long before banks announced a review in the interest rates by an average of three percent to protect their profit margins.

Several banks have in the last two weeks released impressive third quarter results which show that their profitability is still on the growth trajectory despite the gloomy economic outlook.

The picture is expected to be more depressing should the MPC increase the base rate to 13 percent or higher as is widely expected in line with the call to further tighten the policy stance.

And although focus has largely been on the reduced borrowing, rising interest rates also pose another risk of escalating loan defaults as borrowers increasingly find it hard to service their debts.

“When the cost of credit jumps from 15 (percent), 16 to 18, 19 and 20 percent, it will blow up many business plans,” he explained.

This, Satchu said will be reflected in a rise in the banking industry’s Non-Performing Loans which have over the years been declining to stand at 6.2 percent as at December 2010.

“I think that trend is now ended. There is no way that they can decline at the pace that interest rates are climbing now so I think we are going to see an increase in exactly the same number,” he said.

With these developments, it is also unlikely that the economy will register the projected five percent Gross Domestic Product growth this year.

Coupled with the fact that the country is nearing an electioneering period and has also been dogged by racketeering that has seen commodity prices nearly double, Satchu predicts that the country’s GDP rate should be in the range of four to 4.5 percent.

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