Arun Mathur

CEO's Profile

Theme |
Topic | The Interest Rates Environment
MONTH | March 2014

Interest Rates and the Macroeconomic Environment

Discussion Focus Area

  • Factors that influence deposit and loan interest rates
  • Defining the interplay between Central Bank Rate and bank lending rates
  • The role and impact of Credit Information Sharing
  • Promoting industry competition through pricing transparency
  • Reviewing the 2013 interest rate environment and expectations for 2014

Interest rate is the price a bank will pay for a cash (deposit) or capital; as well as the price a bank will charge for a loan, credit or financing. Typically banks raise deposits from individual customers; but more so they raise wholesale deposits from corporate clients and various investors. These wholesale deposits tend to be more expensive for banks, however, a bank will pay a premium (higher interest rate) on a deposit based on the tenure. The bigger the deposit and the longer the tenure, the more leverage the customer has to negotiate a higher interest rate.

There are many internal and external factors that influence both deposit and loan interest rates. These factors include both fiscal policy (how the Government raises capital and finances its annual budget), as well as monetary policy (how the Central Bank of Kenya promotes stability through managing inflation, liquidity in the market, and the value of the Kenya Shilling).

While banks will continue to make efficiency-enhancing investments to the ultimate benefit of borrowers, there are expectations that the policy-related aspects within the Government’s control will be given due attention by policy makers so as to enable the industry to bring down the cost of credit.

Through KBA, the industry has supported several initiatives to address the risks that contribute to higher costs of banking; the Credit Information Sharing Initiative is one example which will see banks better price their loan products – based on the individual customer’s risk profile. This initiative also minimizes the reliance on traditional collateral, which is a challenge for most.

Another promising industry intervention is enhancing competition and promoting consumer protection through pricing transparency. Towards this end, KBA has adopted a transparent pricing mechanism to facilitate full disclosure on the cost of borrowing to loan applicants.