As a lobby for banks, the Kenya Bankers Association (KBA) has in recent weeks cudgeled the Central Bank of Kenya (CBK) on its determination of interest rates as if it was a lethal adversary. It is not.
As a macroeconomist, and monetary policy analyst, I have often reflected on the similarity of the interest rate question to tectonics deep in the earth’s crust.
Just as they often shift without unleashing earthquakes, they leave geologists to find the cracks and unravel changes needed, with knowledge.
Macroeconomic transformation of Kenya is not just a theoretical exercise now but a lifeline to the future.
For CBK, credit is an important link in policy transmission that it shapes in the regular meetings of the Monetary Policy Committee. Bank lending finances production, consumption, and capital formation, driving economic activity and control of inflation.
In the rates debate, neither CBK nor the KBA has taken off their suits to throw punches, and media quacks are throwing the wrong ones for them.
CBK’s is a case of ‘moral suasion’ in the parlance while it carries a big stick on the base lending rate setting for banks.
The long-suffering victim of the blows the debate inflicts is not the two parties, but the Kenya economy through poor access to loans, especially private sector loans.
CBK is the authority empowered on monetary policy in coordination with fiscal policy. Article 231 of the Constitution sets out key authorities: "… be responsible for formulating monetary policy, promoting price stability, issuing currency, and performing other functions conferred on it by an Act of Parliament. …shall not be under the direction or control of any person or authority in the exercise of its powers or in the performance of its functions."
KBA has brought a rumble on interest rates to a boil simply to protect super profits the member banks make from the deposits of Kenyans.
For starters, owners of banks typically own only 5-10 percent of liabilities on their balance sheets, while bank customers contribute the rest in deposits. In their core business of financial intermediation, banks ideally build their business on the assets side with loan portfolios to the business sector with some lending to government in securities.
In Africa, it is the perennial infringement of this tenet of intermediation, from colonial times, which has killed confidence among the 90 percent-plus depositors on what banks do with their money. Little is loaned to the private sector, and banks flag excuses such as riskiness and non-performing loans sometime in exaggerated language to be left to play the financial markets for their super profits.
Under-lending to the private sector in Sub-Saharan Africa is dire, and is even more calamitous in Kenya.
In contrast, monetary policies in major regions of the world that have prospered, such as the US, and China among others facilitate banks to lend to private sector borrowers and thus drive economic growth.
Work done in early 2000s by the late President Kibaki and his Finance Minister, the late Mwiraria, enacted Vision 2030 and the Financial Services Reform Act, and opened windows in the financial sector.
It permitted private sector borrowers to break the jinx. Even small and micro borrowers like boda boda operators benefited. By dint of subsequent broken regimes, we are back to square one, in banking as in vision for economic transformation.
Any access to private loan funding from Kenyan banks for domestic (or even foreign) investors comes at distorted and highly prohibitive interest costs that drive non-performing loans, that banks use as pretexts not to lend.
With the captive market of mismanaged public finances in Kenya, they instead mop up cheap customer deposits in liabilities, then prioritise lending to government in profitable securities repayable by taxpayers, while bankers play golf.
It would be funny if it were not so tragic that African banks then pretend to beat world class banks in super profits.
The numbers show it. In African Business findings (2024) Africa's top 100 banks in 2024 posted a return on equity (ROE) of 20 percent, double the average ROE for US banks for the 1st quarter of 2024, at 10.3 percent.
When KBA expresses alarm on losing profits from CBK’s proposal of a Central Bank Rate (CBR) with a “K” premium, it is these super-profits they strive to protect.
CBK’s achilles heel
CBK is in a technical dilemma, however. While it argues that to inject transparency on perceived distorted and high interest rates, a shift from Risk-based Credit Pricing Model (RBCPM) used since 2019 when rate capping was scrapped, to the CBR augmented with a risk premium named “K” is appropriate, it is complicit in its “Fiscal Agency” mandate for fueling the banking distortions.
Is it a surprise that banks emasculate MPC decisions? CBK is helping them to do so.
The collusion
CBK markets and operationally runs securities in a system that reeks of both collusion by banks and non-inclusion of most Kenyans.
Among large, medium, and small banks, (called Tier 1 Tier 2 and Tier 3, respectively) Tier 1 banks corner the purchases of government domestic debt over other Tiers.
One hopes collusion in securities biddings is kept to the minimum. Furthermore, taxpayer repayment dimes might leak to foreign holders of the assets. The smart move for CBK to keep its hands clean is to advise the government to at least adopt primary dealerships in securities.
It would mean licensing a few reputable and vetted banks as ‘Primary Dealers’ in securities issued by government, a move that upgrades the development and efficiency of financial institutions in handling government securities operations.
The licensed banks would be responsible for rules-based ‘market making’ for all purchases and redemptions. The system is widely used in central banks such as the Federal Reserve in the US. In the neighborhood, Uganda applies the system with eight banks as Primary Dealers.
Dr Mbui Wagacha is former Senior Economic Adviser, Executive Office of the President. He worked for AfDB and was Acting Chair, CBK.
