Business Daily (Nairobi)
Carol Musyoka
30 November 2009
column
A few years ago some scientists decided to do an experiment.
Inside a cage, they hung a banana on a string, placed a set of stairs under it and placed five monkeys inside.
One of the monkeys started to climb the stairs toward the banana.
As soon as it touched the stairs the experimenters sprayed all the other monkeys with cold water.
When another monkey made an attempt to get the banana they again sprayed the other monkeys with cold water.
Consequently, the monkeys prevented any of their group from going after the banana.
The scientists took one of the original monkeys out of the cage and introduced a new one who, upon spotting the banana, went after it.
To its surprise all of the other monkeys attacked it.
After another attempt and attack the new monkey learned that if it tried to climb the stairs and get the banana it would be assaulted and so it stopped going after the banana.
Second monkey
Next the experimenters removed another of the original five monkeys and replaced it with another new one.
The second new monkey went to the stairs and predictably it was attacked.
The first new monkey took part in this punishment with enthusiasm!
Every time the newest monkey took to the stairs it was attacked by the other monkeys.
Most of the monkeys that were beating it had no idea why they were not permitted to climb the stairs or why they were participating in the beating of the newest monkey.
After all the original monkeys were replaced none of the remaining monkeys had ever been sprayed with cold water.
Nevertheless, no monkey ever approached the stairs to try for the banana. Why not?
Because as far as they knew: "That's the way it's always been done around here."
I remembered this story as I watched the Central Bank Governor imploring the banks AGAIN to drop their lending rates last week after the Monetary Policy Committee dropped the Central Bank Rate (CBR) to its lowest level of seven per cent.
By the end of the week, he was on news reports on television asking customers to prevail upon their banks to reduce their rates--sounds to me more like asking customers to engage in mass action against the banks since the latter have failed to respond to the "signals" being sent by the CBR rate cuts.
This is where the monkey story comes in.
You see, the banks have never used the recently introduced CBR to determine their base lending rates.
Each bank has a different mechanism for calculating its cost of credit, taking into account the operational and market risks into the pricing methodology.
Some will use the 91 day Treasury bill as the starting point for assuming the risk free cost of money and then load the credit risk component based on the size of the non performing loan book and its attendant drag in the form of provisions for these bad loans.
Added to the credit risk component are the operational costs of the bank, the costs of paying the deposits used to fund the loans and so on and so forth.
Essentially that's the way things have been done around here and trying to get the banks to reduce their base lending rates will require more than subtle signals and overt gestures.
Looking at historical data from the Central Bank on the weighted average interest rates of commercial banks from 1999 to 2009, one struggles to find any correlation between the 91 day Treasury Bill, deposit rates and lending rates.
Over the last two years, the spread between what banks pay for deposits and what they charge for loans has fluctuated between nine per cent and 10 per cent, with deposit rates having been slow to rise to their current levels of approximately five per cent and average lending rates remaining relatively stable at approximately 15 per cent band.
We started to see significant expansion of credit in the marketplace in 2003 and several local banks expanding their branches and getting their presence felt in the market.
But because the new players found that the established banks have set a trend of maximising a spread between deposits and loans, as well as maintaining a spread between what the 91 day treasury rate is versus their lending rates-- which spread over the last six years ranges between 14 per cent at its highest and 6 per cent at its lowest-- they fell into the culture of that's the way things are done around here.
If you look at the results of most of the banks, you will find that the typical ratio of gross interest income to non-interest income averages 2:1, meaning that for every two shillings of lending income made, they make one shilling of fee and transaction income.
This speaks to a conventional reliance on lending income as the revenue mainstay and therefore exposes a soft underbelly that cringes at the threat that an interest rate knife cut portends.
You must also bear in mind that with lending income providing a significant portion of revenue, and rising costs of production caused by branch expansions and higher provisions for bad loans, it makes it difficult for a bank to drive down the cost of its loans against an already established cost infrastructure unless the bank strategy shifts in favour of driving higher transaction income (which is inordinately much harder to generate than loans) or driving loan volumes and face the probable risk of increasing the non-performing loans and the provisions.
Operating costs
So this is my two cents worth of opinion.
The cost of providing credit in this country is high because the historical method of providing this credit is bricks and mortar channels that carry high operating costs.
The inflation numbers, by whatever method of calculation that is the flavour of the day, are not good and speak to the fact that increased cost of living will see increased loan defaults in the future.
For as long as it costs you more money to fuel your car, far more money to pay for your basket of consumable goods at the supermarket and without a doubt, far more money to pay your fuel adjustment levy than your basic electricity consumption there is very little light at the end of the inflation tunnel that illuminates an ease in the cost of living.
Our banks have shown the regulator that since its introduction, the CBR cannot and will not guide the cost of lending in this market.
Unless someone bucks the trend -- and I highly doubt that there is a bank with a cost base so low as to be the one to blaze that lonely trail--that is simply the way things will continue to be done around here.
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