Wednesday, 25 July 2012

Interest Rates In Kenya: What you need to know as a consumer.

Many are times that we take things for granted, or to be specific, how many times do you wish there was no Business News segment in our 9.00 PM news. You will find yourself running to the shower,or to the chicken when NTV,Citizen or KTN hit the business segment. You the appear when Wahiga Mwaura is about to present the sports segment. Occasionally from your kitchen you will hear the presenter go on about the Kenya shilling performance against the Dollar, how Bamburi, Kakuzi and others performed on the Stock market..Then he will talk of bank interest rates and you just wonder,who gives a damn about the interest rates.

Wait a minute, from today you should start giving a damn about whatever the presenter is screaming about on interest rates. Why? Because at the end of the end it directly affects you. The Kenyan public is more of a consumer nation and that explains why we are always waiting for the end month or worse off for that MPESA message to pop so as to hit the mall for that new dress or electronic.. If you are in Thika and you form part of this group, stand up, go to the shop and buy that product called Damn..because you should start giving a damn.
The consumer Federation of Kenya is the umbrella body that acts as a check on all matters pertaining to the Kenyan consumers. It organizes seminars and talks that are aimed at empowering the consumer and making them aware of their rights as consumers. It helps cushion Kenyan consumers from exploitative prices, low quality goods and general exploitation by the public and the corporate sector.
Well recently it conducted a survey that aimed at examining the effects of bank interest rates on the general Kenyan consumers.
It was found that majority of Kenyan find interest rates charges by banks to be too high for our economy. This was among other findings that we will forecast in coming articles. Today lets just have a general look at interest and the general hullabaloo about their increases, decreases and well..who cares. After reading this,please start caring. Its the the basic lesson that we should learn since many corporates just take advantage of the general ignorance exhibited by Kenyan consumers.
Basically, what is an interest rate (Thika Live Finance 101)
There exists numerous explanations depending on where you are standing but the most basic is:  Its the amount (usually expressed a %) that is charged for use of an asset( read money). More simply, if I lend you some money, you will return the same money (principal) plus an additional amount (interest) which is a certain percentage of the principal. This percentage is the interest rate. It means that,  if am charging you 10% and Joseph is charging you 15% interest, then you will return more to Njoroge than to me (Reader Beware,am not lending at 10%, its just an example). The principal + interest are payable within varied amount of time and this will always depend on the agreement between the lender and the borrower. I cant think of a much simpler definition..

Lets just go straight to the interest rates in Kenya and their effects on the Kenyan consumer.
In an economy there are those who have and those who do not have..The Kenyan economy is not an Ujamaa economy therefore there exists a line between the haves and have nots. The haves can include your local Shylock, that rich uncle, your Sacco, the local commercial bank, the Central Bank of Kenya (haiya) and on top of the ladder the international donors. We are just talking about the local scene so lets narrow down on the banks. On the other side sits the young entrepreneur who has an elaborate business plan, a local producer in need of funds to expand his biashara etc..Different Banks have different bank rates so its advised that you shop around for the Bank with the most affordable interest rate.
But who determines the Banks interest rates
In Kenya, Interest rate decisions are consultatively taken by the Monetary Policy Committee which is within the Central Bank Of Kenya. In August 2005, the 91 day Treasury Bill (TB) rate was replaced by the Central Bank Rate (CBR) which is the the key ingredient to interest rates charged by banks to lenders.  In Business studies and Commerce, we all learnt of the steps that the Central Bank can take to reduce inflation. Matter of fact interest rates was among the first steps. With the power to set the CBR, the MPC can either raise it or lower depending on the general state of the economy.  Recently the CBR was lowered to 16.5% from 18%. This was after the Central Bank recorded a positive growth in key economic growth indicators.
You are wondering about the relationship between Commercial Banks and the CBR.
Banks are allowed to borrow from one another whereby a bank may need to invest in some stocks, government bills and bonds.The bank could also be aiming to finance their own lending needs.Other banks may be in need of boosting their liquidity margins. Some of these investments mature overnight, others monthly and others may take months. This means that a bank may borrow from another bank to finance such investments. For that, Banks charge interests between themselves which is known as the inter bank Rate.You will find the interbank lending rates moving from one range to another depending on the deals that the banks strike between themselves on inter lending.
However, when Banks cant borrow between themselves, they turn to the big brother.This is why Central Bank is known as the lender of the last resort. When they turn to the Central Bank, commercial banks will be lent money but, at the Central Banks CBR..This means that if the CBR is high, then the commercial banks will pay a higher interest when paying back to CBK.
But how do commercial Banks cushion themselves from these CBR rates.
Its common knowledge that Banks rarely make losses especially after they release the annual statements where they constantly hit billions even when all major economic sectors are making losses. When they are charged high lending rates by the CBK, banks transfer this effect to their customer. That explains why Banks immediately raised their lending rates to margins of upto 25% last year. But the irony of the whole matter is why they wont be quick enough to lower the lending rates when the CBK lowers the CBR..less than 10 banks have done so. The commercial Banks will then price your loan from the CBR charged by CBK. However they never stop there,they will then factor their operational costs for facilitating the loans and their profit mark ups. The result is the interest rate at which the loan is charged . the long run how does this affects you as a consumer..
Whenever you purchase a commodity, on the other end of the chain( although invisible), there exists a producer. The local economy especially in Thika relies on Small and Middle Income Enterprises(SMEs) for many products.It could be that farmer in Gatanga, the Jua Kali artisan in Makongeni or the middle level industry along Garissa Road.
To finance large scale and quality production, these producers take up loans from local banks. However when they are charged high interest rates, the producers are affected in different ways. It will affect their direct costs since they wont be able to finance their daily operations. Secondly, it will reduce their affinity to borrow more since they already have expensive loans to service.
Kama ni wewe ungefanya NINI?
With an expensive loan to service, with high business operation costs to finance, with the ultimate objective of making a profit and remaining afloat, the business owner will do the obvious. He will increase the prices for his commodities in order to cover his margins. In short, he transfers the high costs of paying back the loans to the consumer through increases in prices. That day you will find your favorite product in the market has an extra 5 bob on top and just like me, you will start complaining. But in essence what is happening is simple, you are feeling the wave effects that started when CBK raised the CBR.
If you thought that the Business News talk about interest Rates and Central Bank stuff does not affect you, then you have a reason to think otherwise. It is your duty as a consumer to know what is going on,and remember ignorance is no defense.
Thika Live encourages all to exercise consumer awareness and for a start Consumer Federation of Kenya would be a nice place to visit.
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Good Day..

images courtesy of Google


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