The week started at positive note – or so I thought. “Bank CEOs summoned over expensive loans, cheap deposits”, run the headline of this leading business newspaper.
The policymakers are finally working, I thought to myself, as I made my way to an engagement with private sector membership organisations.
When I brought it up as a good development, the participants laughed out loud! A great headline, they said, but obviously a red herring. Why? I pressed on.
That the Central Bank of Kenya (CBK) has to summon commercial bank CEOs to explain why banks are lending at very high interest rates, can only imply either incompetence, policy failure, or that we the public, are being managed.
The banking regulator knows very well that commercial banks are lending at high rates because the CBK policy rate is at 12 percent, and government is happy to borrow at quite high rates. Just last week government borrowed Sh30.5 billion with a re-opened 10-year bond at 15.85 percent.
Why would they expect commercial banks to lend to business for less than that? Stunned, I took a sip from the glass of water.
The lively discussion that followed raised many more questions, that will not fit in one column. I will only tackle two. If high interest rates were to bring inflation down, why are rates still high, and second who are the beneficiaries of domestic borrowing?
As a facilitator, I was at pains to explain, in response to the first question, that there is a time lag, between when the CBK reduces its signal policy rate, and when banks can respond. But my audience was skeptical. Just how long should the time lag be?
Weeks, months, years? I could not answer. And why is the policy rate still 12 percent when inflation is at 2.7 percent. I couldn’t tell, I said.
I had expected a swift, significant reduction, particularly given that inflation may not remain low for a very long time. Reducing the rate from 13 to 12 percent over six months, is just window dressing.
For one, it will not create the much-needed economic stimulus, without which recovery may never materialise.
To answer the second question, we must examine who holds domestic public debt. Over the last decade, an average of 52.4 percent of domestic debt has been held by commercial banks. They are the main lenders, and although this proportion has declined slightly in the last six years, it was still 45.1 percent in 2023.
Commercial banks are paying saving customers an average of 4.01 percent interest rate on the customer deposits.
In turn, banks are earning 13.5-18.6 percent from the Treasury bills and bonds. Infrastructure bonds have the added advantage that the interest earned is tax free.
As a result, loans and advances as a proportion for total bank assets has shrank by 11 percent, from 60 percent to 49 percent, as banks make a tidy profit from this domestic arbitrage.
The primary reason why domestic debt is only held by commercial banks, insurance companies and pension funds is that the process of investing in government securities is restrictive, only accessible to these institutions. It is not by chance.
In 2014, the National Assembly attempted to remedy the situation by passing an amendment to the Central Bank Act.
Proposed by then Mukurweini MP Kabando wa Kabando, it was to direct that domestic debt be issued in much smaller denominations than is the current practice of a minimum Sh50,000 Kenya, and for the Central Bank to make it possible for many citizens to participate by using mobile money platforms in the issuance.
The amendment was vetoed by the President, who preferred that the proposals be implemented administratively, pointing out that the authorities were already taking action.
Their counter proposal was the M-Akiba bond. The first, in which you could participate with Sh3,000 was eventually issued in 2017.
However, the intent of the Kabando Bill, which was for all Treasury bills and bonds to be issued in smaller amounts and using a platform that would enable the citizens to participate, was defeated.
It is great if the CBK summons of commercial banks proceed. But, do not hold your breath. Lending rates may not significantly come down any time soon. Not when government is borrowing at 15.85 percent.
Oddly of course, government would be a major beneficiary of low. interest rates. A five percent points reduction in Treasury bill rates could yield as much as Sh250 billion saving in debt service. Perhaps it is time to revisit the Kabando proposition.
