Expensive loans raise danger on the country’s economy

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  • 3 years ago
  • Posted: March 11, 2016 at 4:57 pm

Few banks have gained massive dominance in Kenya’s lending market forcing upcoming banks to suffocate in a ditch. The non-competitive environment brought by the big dogs may cause a devastating consequence on the economy and Competition Authority of Kenya (CAK) which has been investigating the sector since last year.The friction is mainly caused by the expensive loans.

The World Bank released a report claiming that the high interest rates enjoyed by the commercial banks are a show of luck of competition. “Large banks have the market power to maintain a wide (interest) spread at the expense of borrowers and depositors,” the World Bank says, even as it proposes that an increase in the number of banks and diversification of products would help pull down interest rates.

The current situation may have a negative impact on the country’s economy because corporate and other institutions may shy away from using the services offered by the local banks.

“The economy has largely relied on foreign savings as a source of new investments since 2007, while national savings have been declining,” the report says.

Regulation

To regulate the deposit interest rates, the parliament tried to regulate loan pricing by coming up with a number of laws.

To add on that, last year the CAK launched investigations into the competitiveness of the lending market whose initial focus was the market structure and concluded that the structuring is adequate to support competition.

“The first report never said the rates are competitive but only stated that structure is not the cause of whatever challenges are there,” said Mr Wang’ombe, adding that the authority launched a second study last month that focuses on issues such as consumer protection, information flow and transparency in billing’s “contribution to the current rates.”

Business Daily reports, the interest issue was picked up by most MPs and they are debating on the Bill that was tabled by Kiambu MP Jude Njomo seeking to cap interest rates by law — the fourth time such an attempt is being made in six years. The Bill seeks to keep interest rates at no more than four per cent of the base rate set and published by the CBK.

“I think the issue here is one of market dominance —so they (large banks) will want to throw their weight around because they have a first mover advantage, a large network, big depositor base, wide array of services— so in a sense they feel comfortable that they don’t need to change,” Dr Njoroge said.

I believe with proper regulation in place, the expensive loans will be standardized.

What is your opinion on the topic?
Erick Vateta
Tech Editor at Kachwanya.com
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Erick Vateta is a lawyer by training, poet, script and creative writer by talent, a model, and tech enthusiast. He covers International tech trends, data security and cyber attacks.
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