Cost of bank loans rises even as T-bill rates edge down. I'll call this the high wire act where CBK is finding it hard to force down the lending interest rates for commercial banks to follow suit. If this trend continues by Q2 2012, the financial firms results will be browning to say the least. Double digit profit margins will disappear as well. Many of them will be forced to form ingenious ways of pulling out of this slippery slope. Treasury is currently caught between a rock and a hard place. Whichever choice they pick now will be a tough call for the economy. Back in Jan, Treasury said KE will sees 5% GDP growth in 2012 with good rains. When Jan 2013 comes, their score card will have nasty grades coz of domestic debt and inflation which will pressure the USDKES rate upwards. Watu wajipange. I can see expensive food once again with stymied wages at the same time job cuts. I can see food issues becoming a political campaign trend in later parts of the year into 2013. Caution!
http://www.businessdaily.../-/53813wz/-/index.html
Quote:The World Bank and IMF (2001) found that the rise in the domestic interest rates is more pronounced if the investor base for domestic debt is relatively narrow as the government may be held hostage by a particular group of investors. A wider investor base reduces the monopolistic tendencies of certain investor groups such as commercial banks and brings down borrowing costs. It also minimises potential rollover risks associated with short term borrowing. Broadening of the investor base can be achieved through promoting investment by retail investors and introducing relevant reforms in the financial sector mainly comprising of insurance companies and pension funds to encourage their investment in
government securities.
Excessive domestic borrowing could also crowd out private sector investment as the government competes with the private sector for private savings. This is more so in developing countries like Kenya
where national savings are quite low compared with those of developed countries. Increased demand for limited financial resources from commercial banks and other non-bank investors’ driving interest rates up. This increases the cost of borrowing and hence reduced credit to private sector which eventually undermines private investment. Christensen (2005) examined the domestic debt crowding-out effect on private sector credit for 27 sub-Saharan countries, including Kenya, and found significant evidence for the
period 1980 to 2000.
Further reading -
http://www.africametrics...2/maana_owino_mutai2.pdf$15/barrel oil... The commodities lehman moment arrives as well as Sovereign debt volcano!