CBK TO ACT ON INTEREST RATE SPREAD

GREAT NEWS: CBK sees the interest rate spread--the difference between what the bank pays a depositor for having money banked with them and the interest rate charged for loans-- of as much as 9.7% as 'too huge and believes this could be smaller.'

The CBK concern means that we should expect a couple of stringent directives and regulations to thin out this margin. The spread has remained about 10% for over a decade with no substantive explanation.

In my article on APR--the first to mention Annual Percentage Rate--I delved into the issue with the hopes that the banks will look at ways to reduce the spread. Instead, banks chose to go the way of introducing several minimalist fees such as at the ATM, when opening an account etc etc. while avoiding the emotive issue that is the stubborn spread.

With this latest move, the CBK governor is touching all the right buttons.

Kenya Bankers Association has itself admitted that despite the liberalization of the financial sector, high interest rate spreads is still an issue of concern in a number of African countries, including Kenya.

Incidentally, on average, big banks have higher spreads compared to small banks while ideally; interest rate spreads should have thinned with increased liberalization and financial sector deepening.

This is a reverse pointer and a curious point because ideally, bigger banks should attract thin interest rate margins.

So why the wide spread then and how can it be tackled? A wide deposit-lending interest rate spread is an indication of inefficiency in the Kenyan banking sector.  Many agree however that the profit motive plays a bigger role in bigger interest rate spreads.

A CBK move to tame the same will spur development.

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