CBK’s stand on interest rates harden

Friday, January 28th, 2022 08:48 | By
Central Bank of Kenya Governor Dr Patrick Njoroge. PHOTO/COURTESY

Governor Patrick Njoroge has hardened his stance on review of interest rates by commercial banks signaling tough times ahead for the industry players.

Speaking yesterday during a post Monetary Policy Committee (MPC) meeting, Dr Njoroge said the lenders seeking to increase lending rates must show how they arrive at new rates, rather than just forwarding proposals without evidence or reason.

He said banks are required to refashion their business models signaling the undercurrents between the regulator and sector players.

“We have been working to strengthen the framework of the banking sector. We require banks to redo their business models to deliver on this,” Njoroge said.

“They are coming to us and we are talking to them. If they don’t show how their homework is done, we will send them home to explain their workings.”

Key expectations In what is perhaps a pointer to the struggle between the regulator and the industry players, the governor said he will send back any proposal that fails to meet CBK’s expectations.

Responding to a question about the timings of the roll out of the new risk-based rates, he hinted that the regulator may be working with individual banks on the lending rates, rather than the whole industry.

“You cannot just give us an answer, you need to show your workings to our satisfaction. I don’t think there is anything to be rolled out,” the governor added.

Commercial banks are reported to have complained to the International Monetary Fund (IMF) that the regulator has rejected their appeal to start raising interest rates. In a new report, analysts at Renaissance Capital had also indicated that banks are at an advanced stage of negotiating a risk-based pricing model with the regulator.

The risk-based model would see lenders increase the spread on interest rates compared to the policy rate which is expected to remain anchored at 7 per cent for some time as inflation remains under control.

Banks are currently lending to customers at an average of 12 per cent which gives a 5 per cent margin from the Central Bank Rate (CBR) rate. The interbank rate is 4.6 per cent but the overnight window is 13 per cent meaning banks can borrow cheaply from each other but at prohibitive rates from the CBK.

Price control Banks have accused the governor of maintaining price controls on interest rates despite the repeal of the same by the Parliament in November 2019.

The industry players are hoping that the lending rates review could give them room for breathing as bad loans remain at 13 per cent compared to an African average of 7 per cent, says the Renaissance Capital report.

The governor also added that credit risk remains elevated but the expected growth in the economy will help peter out the risk. Dr Njoroge reiterated that the economy is on a firm growth path as seen in high tax revenues and strong recoveries across multiple sectors including the hospitality sector.

The CBK Wednesday left the base unchanged at 7 per cent for the 12th straight seating of the MPC which analysts say could be maintained in the medium term

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