September 1 2009

I HAD EXPECTED TO SEE COMMERCIAL banks moving quickly to lower interest rates in line with changing monetary policy conditions, and especially after Standard Chartered Bank, one of the largest in terms of assets, set the tone by lowering its lending rates.

The other big banks have stubbornly refused to respond to several recent decisions by the Central Bank of Kenya to lower the cost of lending to customers.

I will not go into the complicated jargon of explaining the significance of what happens when the Central Bank either lowers the cash ratio requirement, brings down the Central Bank Rate, or consistently pumps billions of shillings into the market through the so-called ‘‘reverse repos’’.

As a matter of fact, the Central Bank has been pumping billions into the market consistently since April 24, this year. The effect of all these decisions has been to reduce the cost of funds and make liquidity management easier for banks.

But instead of passing the benefit to businesses in lower interest rates and more credit, the big banks prefer to spur with the Central Bank governor, Prof Njuguna Ndung’u, over whether what he has done so far is good enough for them to respond by lowering lending rates.

The standard refrain from chief executives of major banks is that the Central Bank should do more to lower further the cash ratio requirement.

The matter is beginning to polarise commercial banks. In a rare display of sycophancy, one middle-sized bank recently put out an advert in the newspapers in which it not only announced that it had lowered lending rates, but also declared support and loyalty to the governor — as if what was at stake was a popularity contest between Prof Ndung’u and the intransigent commercial banks.

Several issues arise. First, credit is the lifeblood of business. We will not start seeing the effects of the much-vaunted green shoots of economic recovery until the lending activity starts picking up in a significant way.

The big companies have the option of going to the market directly and borrowing through corporate bonds. The power utility company, KenGen, has just launched a Sh15 billion bond. Safaricom has also sent notice that it will shortly be coming to the market with a bond.

But how about small businesses which depend on commercial banks for working capital? Or companies like retailers or flower farmers whose fortunes change with seasons?

The fact of the matter is that many retailers will lose money for most of the year only to make bumper profits as we approach Christmas.

TODAY, FLOWER FARMING MAY NOT look very good, but fortunes will change when the predicted El Niño rains come, and when expenditure on irrigation falls drastically. How do they finance their operations in the meantime if credit is either too expensive or unavailable?

If commercial banks continue to shun such borrowers or cause them to borrow expensively, perfectly viable businesses may go down.

If credit dries up for a long time for medium-sized businesses, the economic slump we are witnessing right now will get worse.

At stake here is not just an academic argument between Prof Ndung’u and the bankers over pricing of credit. The argument is about how to stop the biting recessionary conditions — how to stem any further closure of businesses, how to deal with the problem of depressed profitability, and how to pre-empt more redundancies and job losses.

Why are the big banks reluctant to play ball? What we are dealing with here is a deeply ingrained mindset within our banking system.

We have a commercial bank system that traditionally suffers an acute case of risk aversion — concentrating on lending its money to profitable businesses.

Our banking system prefers to reproduce existing wealth, rather than supporting risk-takers and creators of new wealth. Most of the money the banks lend will be in the form of short-term overdrafts. Investment in government paper is also another preferred channel.

The system’s oligopolistic structure, with half a dozen commercial banks holding close to 60 per cent of the banking system’s total deposits, has impeded effective competition.

Today, half a dozen CEOs of banks can meet at a golf course and make decisions with grave ramifications for the whole economy.

The only person who came close to rattling these banks was former Gem MP Joe Donde.

nation.co.ke