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.
