DEBUNKING MYTHS REGARDING BANKING AMENDMENT BILL 2015
The banking amendment bill 2015 will help ensure the following:-
- Full disclosure by banks so that consumers make informed decision
- Predictable rates because one can always know the maximum interest chargeable on a loan at whatsoever bank once one knows the base lending rate set by CBK
- Deposits will attract interest of not less than 7.5%
Based on the foregoing, enough conspiracies, myths and fear mongering is ongoing. Some of the key misleading statements being peddled are thus:-
- Capital flight – the straight jacket economists are dreading the flight of capital from our economy as banks invest elsewhere where rates are arbitrary. While such a possibility exists, it is highly unlikely because cheap loans also mean more loan volumes and thus more profits on volumes for creative banks
- Low interest rates mean more applicants thus not all will get loans. This is not true; the banks have billions that the market cannot deplete considering that there are other requirements like collateral or security that many do not have
- Low interest rates mean low profitability for banks. Really, the CBK base lending rate as of now allows banks to charge 14% on loans. If 14% that allows for increased uptake of loans is does not make profit sense then are we really talking about profit or exploitation
- Low interest rates mean banks will not accept low end and risky customers because they are not covered against default by high interest. This is hog wash, banks safeguard against default through vetting borrowers but most critically through insuring the loans.
- Low interest rates will affect SACCO and micro finance institutions; well the only fear would be that banks will eat into the market of this micro-credit institutions. However, Sacco growth is driven by other things such as ease of access to loans, ease in finding guarantors, earnings on investments and ownership by members. Saccos have been charging as high as 18% per annum and as low as 8% per annum…. I do not see why this trend should not continue
- The bill is detrimental to financial deepening? Seriously, is financial deepening dependent on high interest rates or low interest rates? Low interest rates on loans with considerable interest rate on deposits will make more Kenyans value that bank account and take loans some more.
- Our economy will suffer because of low interest rates? Really, I am Keynesian to the extent I believe money circulation is key to economic rebound and growth. Cheap loans would imply more money in circulation as those that can qualify for loans confidently take loans and spend lavishly within the economy
- Banks will not be able to make money due to inflationary issues; hog wash again; the CBR takes into account the prevailing market conditions. The CBR is reviewed from time to time taking into account inflation
- Some bankers want us to believe that credit will contract leading to business contracting and economy suffering. Crap; while silly bankers are focused on these doom prophecies, the really strategic bankers are considering how to take advantage of this macro-economic scenario. While some bankers will suffer, many that embrace the new law will thrive because more Kenyans will be willing to engage and work with banks
- Bankers are really afraid that banking sector will contract and jobs will be lost. Again, the likes of experiments by Equity should teach bankers that they should tear traditional banking rules and engage the market creatively then they will reap handsomely. Those executives that were planning for salary hikes will have to put that on hold. But Kenya is full of cheap labor, so let bankers get strategic about their business models.
- Low interest rates will have an inflationary pressure on the currency leading to our currency falling in value. As a partial believer in Import Substitution, is it not great when importing becomes expensive. Currency devaluation is a strategy many find very potent.
- Low interest rates are not good for Pension funds and Provident Funds? This is another funny thought because such funds invest rather than keep money in savings accounts.
In conclusion, low interest rates lead to a high aggregate demand for loans. Such loans when spend in the economy enhance fluidity in the economy and spur economic growth. For those servicing loans like mortgages, low interest rates imply paying lower instilments and hence having more disposable incomes.
The only major worry with low interest rates is that while a boom can be expected, it may lead to unreasonable borrowing. The unreasonable if not managed may lead to a credit crunch at some point. However, only if the banks do not manage the lending and get excited at increased applicants.