THE RISING COST OF CREDIT IN KENYA

Feb 8, 2016

THE RISING COST OF CREDIT IN KENYA

In November 2015, the Monetary Policy Committee (MPC) met to review market developments and the outcomes of its previous monetary policy decisions. One of the decisions made at the meeting was the retention of the Central Bank Rate at 11.50 percent. This decision was influenced by prevailing financial market conditions; Interbank Rates, Treasury Bill Rates and Short-Term Interest Rates all dropped in November. With the aforementioned, the rational expectation would be that the Commercial Lending Rates would also drop. Generally, this has not been the case.

Commercial Banks in Kenya have since defied calls from the Treasury, Central Bank of Kenya (CBK) and the Kenya Banker’s Association (KBA) to lower interest rates on loans given the current favorable fiscal environment.

The decision to proceed with the implementation of increased interest rates (ranging from 20 to 30 percent) coupled with the ‘extra’ loan costs such as application and processing fees, insurance costs, legal costs, etc. has seen the cost of credit substantially rise.

The rate increment affects existing and potential borrowers and intensifies their financial burden in an economy where the cost of living is already high for a majority of the citizens.

The immediate effect of the increment includes higher monthly loan repayments. The potential impact includes increased defaults on loans and the potential action of Banks attaching assets used as securities (such as log books and title deeds) to procure loan facilities.

CBK Governor, Dr. Patrick Njoroge conceded that the Central Bank had no express authority to determine how much banks charge on their credit facilities. There have been calls from industry stakeholders for the Central Bank to regulate Commercial Bank rates through monetary policies and impose penalties on banks that refuse to cut their interest rates.

For now however, the people have to take charge. The KBA has supported the Treasury and CBK in urging customers to shun banks charging high interest rates.

In addressing the issue, Dr. Njoroge stated; “Our view is still the same, commercial banks need to lower their rates in a proportionate way. This is where people need to vote with their feet, I mean why do you feel trapped? If you think it is a high rate, why not move to another bank?’’

In a competitive environment in which there are numerous financing and credit options from various institutions (including microfinances) the people have a say in which one they choose.

For the most part, Microfinances offer these products at cheaper rates and with lesser costs. In essence they are the cheaper and safer option and the perfect middle ground between the informal, unscrupulous ‘Shylocks’ and the dominant Commercial Banks.

In conclusion, it is important to note that the power still rests with the people in selecting suitable and affordable financial products and services.