In the last two weeks, banks have been lowering the interest they charge on loans after the Central Bank of Kenya (CBK) lowered its rates to 13% from 16.5%. This move has been viewed by many as a good sign for borrowers since it relieves them from high interest rates banks have been charging since October 2011.

Interest Rate Spread

Central Bank Governor Njuguna Ndung'u has however challenged commercial banks to come up with workable solutions to address Interest Rate Spread the industry is experiencing at the moment. Interest Rate Spread is the interest charged by banks on loans to customers, minus the interest that banks pay on savings deposits.

"Fifteen percent on average is too huge. We have looked at comparable countries and we see that they range between four and six percent while ours is between 12% and 15%. It's really not acceptable and we have to ask ourselves; what do we need to do?" Ndung'u said at the Kenya Bankers Association (KBA) conference in Nairobi.

According to the Quarterly Economic and Budgetary Review Fourth Quarter 2011/2012 by the Ministry of Finance the average lending rate was 20.4% in June 2012, while the average deposit rate was about 7.9%. As a result, the spread between the average lending and deposit rates increased to 12.5% in June 2012 from about 10 percent in June 2011.

Interest on Deposits

Ndung'u urged banks to increase the interest they pay on deposits since it would not affect their profits and at the same time having the customer benefit through the interest they earn. High spreads mean that banks are still paying low interest on savings account deposits as interest on loans still remain high.

"We have allowed banks to roll out products, to integrate with the mobile phone financial services platform. In fact, some of the bankers have told us that they have reduced queues in the banking halls. And for us it is a success story because it has reduced the cost of doing business," Njuguna said. "But we would like to make sure once these costs are reduced, let us also see how they filter down to reduce the spread."

[caption id="attachment_20567" align="aligncenter" width="543"] Graph showing Interest Rate Spreads. (Image: Pesatalk)[/caption]