BANKS..INTERESTS AND INTEREST ...THE FACTS Lack of political will the main reason bank loans cost an arm and a leg In its latest Monetary Policy Report, the Central Bank of Kenya laments that bank interest rates are too high. The report reels off a familiar, but depressing, set of figures. The big banks make supernormal profits thanks to a very simple business model. When you deposit money with them, you will earn an interest rate of 4.4 per cent. They then use the same money to lend to you or someone else at a rate of 19.7 per cent. In essence, therefore, while it may be too harsh to label Kenyan banks regulated pyramid schemes, they certainly operate the same extortionate lending practices that have been used by Shylocks throughout the centuries. What is most irritating about the Monetary Policy Report is that the Central Bank poses as though it is completely powerless to do something about these sky-high interest rates. It says that “there is still scope for banks to reduce their (interest rate) spreads” as if it were speaking of an act of nature beyond its power like an outbreak of lightning strikes. This impression given by the CBK and the Treasury that they are powerless to act to lower the cost of borrowing is total fiction. The case for a low interest rate regime and the benefits that would confer to the wider economy is easy to make. The economy grew by leaps and bounds during Kibaki’s first term in part because Finance minister David Mwiraria forced banks to lend. He drastically reduced the government’s appetite for money held by commercial banks, which meant that these players had to go after the ordinary mwananchi and offer them attractive terms. When the public has access to finance, they can channel it to various investment ventures and boost employment. The economic boom in emerging nations such as China and Brazil has been driven by widely available credit facilities which have seen those nations economies surge over the last few decades. China may not be the best example because its economy is very state-led, but Brazil has banks very similar to Kenya’s. When Brazilian president Dilma Roussef asked the banks to lower their rates last year, they dismissed her. “You can take a horse to the riverbank, but you can’t force it to drink water,” Rubens Sardenberg, chief economist of the FEBRABAN (Federation of Brazilian Banks), said, according to the New York Times. But “the horse can die of thirst,” Ms Roussef’s office countered. The president then leaned on state-owned banks to lower rates to a reasonable level. Customers defected en masse to them, and the private banks were soon forced to offer better terms. Why can’t the Kenyan Government follow suit? The government has a major stake in banks including the Kenya Commercial Bank, Cooperative and Consolidated Bank. These institutions are just as expensive as everyone else in the market. It is not that policy makers do not know how to tackle this problem. Kenya has some of the brightest and most exposed bureaucrats around (although too many of them associate with right-wing World Bank types who believe the “market” is the cure for everything). The real problem Kenya faces is that numerous senior officials and government leaders have a vested interest in banks making super profits. President Kenyatta and Deputy President William Ruto (both significant shareholders in local banks) – and the numerous individuals they brought into their Cabinet from the banking industry – would have to commit class suicide to bring some order into the banking sector.
Posted on: Sat, 03 Aug 2013 23:15:18 +0000