Wednesday, September 12, 2012


At the end of August the statistics bureau reported that annual inflation for that month had fallen to 11.9% the lowest level in 17 months.

In March last inflation stood at 11.2% before taking off on a tear that saw it peak at 30.5% last October, the highest it had been in 19 years.

Inflation a general rise in prices caused by too much money chasing too few goods, was triggered by high food prices coupled with campaign spending during last year’s general election.

Wrestling it down to more manageable levels has taken some determined action by the central bank , which while employing the recently introduced Central Bank Rate (CBR) prompted a spike in lending rates during the period.

As a result many people have had properties they had mortgaged to lenders auctioned off to recover debts. Last year’s bank results suggested that the level of bad debt was set to increase this year from below the commendable average of the four percent of industry assets at the end of 2010.

Despite a fall in the CBR rates since the beginning of the year, commercial lending rates which had risen in tandem with the policy rate have not fallen in the same manner.

The public is understandably annoyed at the banks who were so keen to raise lending rates but are not showing a similar eagerness to reduce them. Bankers explain that they in turn borrowed money at higher rates  and those monies will have to work their way through the system before we can see a dramatic fall in lending rates.

In addition they argue that they also need to wait-and-see how the environment turns out in coming months before they can take more decisive action. Yoyoing interest rates would not only be bad for business but could trigger uncertainty whose long term consequences would be hard to predict.

One could argue that they should probably take the loss, after all the informed view last year was that the jump in inflation was a temporary blip that did not warrant the drastic action they undertook.

With a handful of banks controlling 50% of all assets means there is little competition in the sector and therefore responsiveness to the market is sluggish at best.

But then again who can blame the banks’ managers, their job is to extract as much return for their shareholders given the environment they work in.

At the risk of being accused of blaming the victim, our lending rates remain high because our saving rates as a country remain woefully low.

We save one in ten shillings of our economic output this about half of the sub- Saharan average.

The way banks work is that they collect deposits, and then on lend that money at many multiples of what they pay us in interest. The laws of supply and demand then come into play since there is an almost insatiable demand but little savings, the cost of credit is high.

In the event that we pushed up savings up by a few percentage points banks, in an attempt to on lend this money would be forced to be more innovative in the way they lend money and eventually cut lending rates.

Barely twenty years ago, banks were not lending  to the public, happy to park their billions in government paper. But as the formal sector grew and savings grew, banks had to improvise. There is no reason why another jump in savings will not have a similar effect.

There are no legislative initiatives beyond the mandatory contributions to NSSF.  There is scope for tax relief on social security savings, mortgages and health insurance that can boost savings. As it is now even our contributions to NSSF are taxed.

There really is no getting around it. The central bank may huff and puff but there is really no pressing incentive for banks to cut lending rates below a certain point. But if government can encourage savings further, our industry will be more attractive to other banking groups , who will in turn push up the competition.

This is not communist Russia where interest rates are set by the government – and it shouldn’t be. But through clever legislation government can persuade the banks to do what’s best for the country.

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