Discussions about interest rates are often more emotive than those of other market prices. That is the case, I could argue, because being the price of money interest rates have the unique characteristic of simultaneously evoking hope and fear. That speaks to the special attributes that interest rates have as a price, and this can be seen in three respects.
First, as a price interest rates facilitate the balancing of the households' desire to save and businesses to invest. Second, they facilitate the economy’s stabilisation given that they are influenced by the central bank's monetary policy stance. Third, even investors in the equities have their eyes on interest rates as much as they base their decisions on share prices and anticipated earnings.
Given the multi-stakeholder interest and influence on this price – effectively making the banking industry just one of the players – our approach as an industry to ensure that the economy's interest are adequately served has been one of collaboration.Such collaborative endeavour was evident in the recent joint initiative by the National Treasury, the Central Bank of Kenya (CBK) and the banking industry to develop both interim and long-term proposals to reduce the cost of credit while meeting investors’ expectations.
On account of the unique attributes of interest rates that I have outlined, the desirable interest rates regime is one that promotes stability as a way of inculcating a predictable business environment and as a consequence encourages borrowing. This negates the popular narrative framed around the notation that banks are only happy when interest rates trend upwards.
Indeed the banking industry is alive to the fact that sustainably high interest rates adversely impact economic growth, and consequently erode the ease of doing business. We are also conscious of the direct relationship between high interest rates and non-performing loans given that the high cost of credit could constrain client’s ability to meet their obligations.
Further, as an industry we are proud of the gains made in promoting financial inclusion. We therefore do not look favourably upon an interest rates regime that erodes sustainable growth prospects. Any viewpoint to the contrary can only be counter-intuitive, and it is easy to see why.
A stable banking environment is not only good for banks but is also good for the economy. An efficient and stable banking environment is characterized by growth in deposits and lending, and ultimately improved returns on investment. Instability, on the other hand, has a ripple effect across all other sectors and could adversely affect the country’s long-term economic prospects.
It is in this respect that when interest rates sometimes have to inevitably increase pursuant to seeking market stability – for instance under high inflation circumstances or a volatile foreign exchange market – they should be seen as a necessary evil. Fortunately, a high interest environment is not permanent. Once market stability is attained, rates trend downwards as has been seen in the recent past.
The market has evidently picked the signal of declining rates as seen in credit uptake in 2013; gross loans during the year rose by about 18 percent, which represented KES1.6 trillion in new loans directed towards industry and households. Moreover, the March 2014 CBK Credit Survey reports that gross loans and advances grew by 5.6 per cent from Kshs 1.60 trillion in December 2013 to Kshs 1.69 trillion in March 2014, attributed mainly to cheaper credit and availability of investment opportunities.
Even as interest rates gradually ease downwards, a search for solutions that will ensure that the trend is sustained for the benefit of the economy is at the core of the collaborative action that I alluded to. The new initiatives will without a doubt be complementary to some of the measures already put in place to address the challenges associated with provision of affordable credit.
As a core initiative, the banking industry is now in a position to reward good borrowers – who are typically customers with a good credit track record. This is in many ways promoted by the Credit Information Sharing undertaking that is increasingly enabling banks to better price their loan products based on the individual customer's risk profile.
This is being done against the backdrop of measures being put in place to promote competition within the industry through enhanced pricing transparency. Besides passing benefits directly to customers and stimulating competition, these interventions promote consumer protection and empower the consumer.
Another promising industry intervention is the adoption of a transparent pricing mechanism to facilitate standardized disclosure on the cost of borrowing to loan applicants. Currently banks are required to disclose the Total Cost of Credit to loan applicants. Following a two-month piloting process, banks during the course of July 2014 will have transitioned fully to the Annual Percentage Rate (APR) framework which will enable customers to easily compare pricing and make even more informed decisions.
Finally, through the Cost of Credit Committee Chaired by National Treasury, KBA has contributed towards developing several other proposals meant to further enhance pricing transparency, and address the inefficiencies that contribute to higher costs within the financial services sector.
While it is still early days, I can confidently say that banks have embraced the call by His Excellency Deputy President William Ruto to collaboratively seek market-based solutions to the challenge of enhancing access to credit.
The banking public can therefore look forward to the fruits of these initiatives in the near term as well as in the long term. Some efforts will take time to take root, but others such as the Total Cost of Credit disclosures will immediately empower customers to shop around and negotiate better with banks.
We invite bank customers to visit www.kba.co.ke to download the template Total Cost of Credit document, and read the “Consumer Guide to Banking in Kenya” which are two good resources which KBA has developed to further empower Kenyans.
The writer is chief executive of the industry umbrella body, Kenya Bankers Association.