The Kenyan banks have proven they can arm-twist the Governor and push him to a corner with sleuth techniques.

The governors plan of bringing down lending rates seems to have hit a wall after a month characterised by a market manipulation which I suspect was carried by this banks.

Now he has been forced to increase the interest rate even when we have two long term bonds in the market, to the benefits of the banks at the expense of the general economy.

I think the governor is useless our market is so susceptible to manipulation and this is because CBK has weak monetary policies that do not stimulate the economy as they aught to.

The banks dug in. CBK sent investigators to find out about the slide of the shilling against major currencies. Banks got their way. Interest rates are up. Lets face it, the thing that has been helping the value of our shilling is the high interest rates. High interest rates means less liquidity as bonds will be taken up and also means cheaper imports (cheaper dollar) which equals reduced inflation which is on everyones mind.

Could be a good thing provided government interest repayments are manageable.

The Governor has done his part by hiking the CBR in response to inflation. Please note that the CBR is an indicative tool & not an enforcement one. It happens that our banks are highly liquid & so don't depend much on CBK thus they respond to signals at their own pace. If our banks were liquidity strapped as it were abroad then the opposite would be true: Is it good or bad for our banks to be liquid is a question out there. Secondly, the meeting of the governor with the banks resulted in the immediate gains of Kes Vs. USD which to me enhances my confidence in CBK that they were right about the speculation & they knew exactly whom to talk to (banks) to stop it. On the otherhand i am so looking forward to KCB having made us a FORTUNE off forex trading & comissions! in the up-coming Q1 results!!

Just how much have banks borrowed through the CBR window this week? I'd think that's an example that the governor is more capable than most would think.

The Nairobi Law Monthly for March 2011 has a great article on 'Kenya's lazy banking'. The author is a risk manager in a Saudi Arabian Bank.

So we go back on liberalisation?

@selah. You're right. It's difficult to reign in the Kenyan banks; CBK needs autonomy from Treasury in order to immunize itself from manipulation. I remember the debate on whether the constitution would usher in other laws that would eventually see the Bank become more independent (though I didn't have high hopes).

Did you see the change in stance though this week after CBK mopped up liquidity on 25th. Almost immediately interbank shot up 100bp; CBR has been seriously active this week. But if I recall banks said the biggest determinant of lending rates was cost of funding; i'd say those will definately rise now.

Bank's love investing in g-secs because they offer a safe, risk-free and less volatile route that is highly lucrative. I do,you do,so why not banks?
Let's face it,lending in Kenya is made expensive partly by inefficiencies in national systems eg the judiciary (too long to hear & determine bank-defaulters cases), the land & company registries also have inherent weaknesses in registration of securities and some are outright centers of graft (remember the saga of PS dorothy angote unearthing files at Ardhi Hse?), etc. All these add to the Bank's costs of doing the lending business - legal, administrative, auctioneering, reposession, investigation fees, etc
This is one reason why interest spreads between deposit and lending rates remain high (although they can be narrowed). But lending remains the bread and butter of banking globally and huge investments in g-secs locally must be revealed for what they are: lazy banking, not the core business of banks and bank management making huge investments in g-secs are not thinking beyond a 2-3 year profits of the bank (as opposed to sustainable, i.e such management plans with short term horizons in mind (very risky for long term investors). For such management their chickens will come to roost with a vengeancewhen their banks' top and bottom lines will be severely jolted by the volatility of rates.

Still, our financial mandarins at Treasury/CBK clearly need to formulate policies that will result in narrower lending spreads - but this is wide and includes removing all the national inefficiencies affecting the lending process.
The buck largely stops at the govt.feet.

This position is based on hollow statements that cannot and are not supported by facts!

What the the "sleuth techniques" you mention in para 1?

How was the market manipulated as you state in para 2; and by whom specifically?

Your position in para 3 has already been commented upon by another poster, but I reiterate: the CBR is INDICATIVE. It is not mandatory

What are the "weak monetary policies" you are referring to in para4? Please give specifics.

@mukiha I have quoted two articles from BD, one is written by the governor, to show you how these banks were able to arm twist CBK into raising the rate,although I agree some of the factors include raising commodity prices like oil but Currency speculation is among them.



Few days later CBK decided to intervene by increasing the CBR...who would benefit from such a move? Banks obviously.

@selah;

Suppose you were the governor and you are faced with rising inflation and weakening local currency, what would you do? And how is the MPC's decision to raise the CBR wrong?