The commercial banks through the Kenya Bankers’ Association have tabled new proposals aimed at convincing legislators to drop their quest to control interest rates.
One of the key proposals is to allow banks to transfer existing loans to cheaper rivals- mobility of collateral. This ability to transfer loans means the borrower continues the search for better deals even after signing up with one lender. This means that although an individual obtained a loan from Bank A it would be possible for him to search for another bank say, Bank B, with more attractive interest rates and transfer the loan such that he makes payments and eventually settles the loan with Bank B at a lower interest rate.
This is means that each bank will aim at having the lowest rate in the market so as to attract borrowers who in turn will transfer their loans to them. This will create competition among the banks that should eventually bring down the interest rates on loans as rates steadily decline due to this competitive pressure.
The Kenya Bankers’ Association (KBA) said its members have also agreed to increase inter-connectivity between them to ease communication and speed up interbank transactions, but sharp differences remained over the setting up of lending and deposit rates.
Banks have recently argued that lending rates would drop if the cost of money as expressed by the benchmark Central Bank Rate (CBR) goes down. The CBR has remained constant at 18% over the past 4 months as the Central Bank hopes to induce a further drop in inflation beyond the 3% drop observed over the last few months.
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