Redemption at last for Kenyan banks?

Commercial banks are exploiting loopholes in the rates cap law to continue charging interest above the stipulated 14 per cent, even as they push for it to be repealed.

The law introduced on September 14, 2016 stopped banks from charging exorbitant interest rates by capping lending rates to four percentage points above the Central Bank Rate (CBR).

The CBR has remained at nine per cent for most of this year, forcing banks to only lend at a maximum of 13 per cent.

However, some banks are using the gaps in the Banking (Amendment) Act, 2016 to levy higher interest rates.

The Kenyan central bank’s Monetary Policy Committee said last month that it will hold its next rate-setting meeting on November 25, the banking regulator has said.

CBK held its last benchmark lending rate at 9.0 per cent, saying inflation expectations were within the target range and the economy was operating close to its potential.

Monetary policy consists of decisions and actions taken by the Central Bank to ensure that the supply of money in the economy is consistent with growth and price objectives set by the government. The objective of monetary policy is to maintain price stability in the economy. Price stability refers to maintenance of a low and stable inflation.

The Central Bank’s monetary policy decisions are made to maintain a low and stable inflation rate over time, which is an indication of price stability.

Inflation is a general increase in price levels over time. It is based on the prices of various consumer goods and services, which are evaluated and statistically represented in the Consumer Price Index (CPI).

The month-on-month (or year-on-year) inflation rate is determined by comparing the CPI for a particular month to the CPI of that same month in the previous year.

Inflation is caused by numerous factors, both locally and internationally. For example, during periods of drought or excessive rain, the prices of food could increase, leading to an increase in the inflation rate.

International factors like increases or decreases in oil prices can also lead to changes in inflation reflecting movements in energy and transport costs.

Depreciation in the exchange rate against the major currencies can also cause inflation since Kenya is a net importer of goods. Inflation can also be caused by factors that influence the demand for goods and services, like the amount of money ordinary people have available to spend.

High levels of inflation inhibit economic growth and cause the Kenya Shilling to lose value compared to international currencies, thereby discouraging the purchase of Kenyan goods and services.

It also makes it difficult for people to make long-term financial decisions, as they cannot be sure about the future value of their investments and savings.

If there is a general decrease of prices over time due to a collapse in demand or increased supply of goods and services, then there is deflation. Deflation inhibits economic growth by reducing profit and lowering investor incentives.

Monetary policy is guided by a monetary programme, which is premised on the economic growth and inflation targets provided by the National Treasury. Monetary policy decisions are made by the Monetary Policy Committee (MPC).

The MPC meets at least once every two months and reviews data and analysis from various sources including the Central Bank Departments enabling it to decide on any action to maintain or vary its stance.

Commercial banks in Kenya are required by law to keep a specified proportion of their total deposits at the Central Bank. This proportion of deposits is called the Cash Reserve Ratio (CRR), and when the Central Bank needs to significantly adjust the amount of money in the market, it can increase or decrease the ratio.

The CRR deposits are held in the CBK at no interest. The CRR is currently set at 5.25 percent of the total of a bank’s domestic and foreign currency deposit liabilities. To facilitate commercial banks’ liquidity management, commercial banks are currently required to maintain their CRR based on a daily average level from the 15th of the previous month to the 14th of the current month and not to fall below a CRR of 3 percent on any day.

Additional reporting by Daily Nation