Government urged to reduce domestic borrowing

By O’Brien Kimani

The Central Bank of Kenya

The Central Bank of Kenya has now devised the Kenya Banks Reference Rate which commercial banks are supposed to use to tabulate their interest rates after trying to influence lending rates in Kenya for a long time without much success.

Financial services firm RSM Ashvir Chief Executive Asif Kassam says to lower the lending rates in Kenya the government needs to reduce domestic borrowing and continue investing in infrastructure.

The cost of credit in Kenya has been a key concern not only for the government but also for borrowers.

In 2006, the Central Bank of Kenya introduced the base lending rate also known as the Central Bank Rate (CBR) to force banks to lower the cost of credit.

The bank pegged the CBR rate at 9.75 percent and set up an independent monetary policy committee to review monetary policies in the country.

Apart from stabilizing the monetary environment these measures have done little to control lending rates in the country.

Kassam says to lower lending rates, the government needs to be more pro-active in the market by reducing its domestic borrowing and continue investing in infrastructure.

This year the government plans to borrow 192 billion shillings to partly finance the 1.78 trillion shillings budget.

Previously, interest rates were set based on the cost of funds, cost of equity, the operating costs, profit margin as well as provision for bad and doubtful debts.

But this is set to radically change with the introduction of the Kenya Banks Reference Rate which has been pegged at 9.13 percent.

Kassam says interest rates in the country are unlikely to reduce in the short to medium term if the government continues selling treasury bills and bonds.