Cheaper loans in the offing as interbank lending rates fall significantly

By Correspondent

Kenya’s small and medium enterprises (SMEs) will soon be able to access cheaper loans according to financial experts.

This is after the interbank lending rates fell to a sixth-month low of 12.922 percent on measures and reforms initiated by the Central Bank of Kenya (CBK), which are expected to bring about lower rates for commercial banks.

Speaking while reacting to the latest data by the banking regulator, Peter Macharia – a financial analyst and the Chief executive officer of micro-lender Jijenge Credit, said that “a falling interbank lending rate indicates that it is becoming easier to borrow money,” possibly forecasting an increase in economic activity.

An interbank rate is the rate of interest charged on short-term loans between banks. Banks borrow and lend money in the interbank lending market in order to manage liquidity and satisfy regulations such as reserve requirements.

On the other hand, a rise in the interbank lending rate means that it is getting harder to borrow money, meaning business activity is likely to slow down.

Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential bank runs by clients.

If a bank cannot meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets.

These rates are particularly significant to a prospective borrower.

Interbank lending is the basis for consumer loans, and so it impacts consumers just as much as it does financial institutions. The interest rates on various credit products such as car loans, and adjustable-rate mortgages for instance are bound to fluctuate based on the interbank rate.

This change in rate, according to Macharia, helps determine the ease of borrowing between banks and consumers.

“When you borrow money from a bank today, the interbank lending rate formulae may account for part of your interest rate. A high interbank lending rate means that you may have to pay a higher interest rate on for example your personal loan or your mortgage while a lower one means a more favourable rate,” said Macharia.

It is a move brought after the CBK’s monetary policy committee approved in August last year, a new monetary policy framework that compelled banks to pass on benefits of low lending rates to consumers, something that could soon start bearing fruits amid a tight credit environment being witnessed in the economy.

Under the reforms, the interbank lending rates are expected to remain around 1.5 percent of the prevailing central bank rate (CBR), from 2.5 percent previously. The framework also spelt the need to have interest rates on interbank lending pegged at a maximum of 14.5 percent or 12.5 percent with the CBR set at 13 percent.

The need for a uniform measure of interest rates across financial institutions became necessary as the market for interest rate-based products became effective after the Central Bank of Kenya (CBK) signaled these radical changes, something Macharia reckons “could be starting to pay off.”

As a result, Macharia notes that business owners that are addressing rising interest rates head-on may now announce adjustments to their growth or expansion plans, especially if a plan previously relied heavily on debt, adding that they may also consider different sources of finance.

“Borrowing costs by customers could now come down in tandem with the fall in the interbank lending rate. Commercial banks unable to borrow from the interbank window are expected to turn to CBK’s emergency overnight facility known as the overnight window, a last resort option for banks,” he says.

This also comes amid an ongoing debate on a controversial law with Kenyan MPs on Wednesday morning kicking off a discussion on the Finance Bill, 2024, which spells out a raft of revenue-raising measures for President William Ruto’s administration.

The legislatures will also speak to both the contents of the Bill itself and the recommendations of the Departmental Committee on Finance and Planning after the government dropped some taxes. The outcome of that debate will be known after 5 working days.

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