In the last couple of weeks we have seen commercial banks increase their base lending rates to what the business community call punitive levels. Borrowing money from banks now attract interest rates in the range of 30 percent, which many of us thought had gone down in history with the Nyayo era.
Commercial banks are responding to the intervention of Central Bank of Kenya. In its bid to curb the runaway inflation and prevent the shilling from losing more value against major currencies, the CBK has been raising the Central Bank Rate (CBR), which is the rate at which commercial banks borrow from the CBK, which in turn determines the interest that commercial banks charge borrowers.
This has elicited mixed reactions among analysts who have failed to agree and tell us precisely how this is going to affect our lives as consumers and business people, both in the short term and in the long term. What has gained prominence in the media and in the streets is that businesses are going to hurt resulting in massive defaults, loss of jobs, and decline in economic growth leading to untold suffering for the common mwananchi.
Well, I too don’t have an answer but I seek to provoke you we reason together. Before we are consumed by negativism and demerits of high interest rates and fail to see the bright future, lets us see the other side of the coin of low interest rates regime that we have enjoyed especially during the post Nyayo era.
The low interest rate era that started as soon as Kibaki-led National Rainbow Coalition government took over in 2002 led to many things that significantly affected the business community and the lifestyle of every Kenyan. I will mention only two.
First loans became not only cheap but readily available. Many ordinary businesspeople were able to get the much needed finance to boost their businesses with or without the traditional collateral. This led to rapid economic growth and high liquidity in the market. This growth of course put constraints on social infrastructure and amenities.
Business and residential premises became expensive creating more opportunities for lenders to come in and facilitate and to finance using money they did not have (mainly depositors money and offshore loans).
Cheap loans created a consumerism society, which at first looked good for the economy and business people smiled all the way to the banks. This takes us to my second major thing: The rapid growth of unsecured loans advanced to salaried people.
My economist teacher in high school taught that loans can only be used economically to fund income generating projects, where the gains in form of profit or appreciation are higher than the interest charged. This age old principle apparently took the back seat.
Anybody with a pay slip or regular income could access money from commercial banks. This led to hyper consumerism. The financial pillar of delayed gratification became outdated overnight.
Anybody with a modest salary could within six months of signing contract get a car, the latest home theatre, furniture and a total overhaul of wardrobe, and an assurance that the car will always be on the road courtesy of the credit card.
But this offered only short term gains to our economy and general wellness. Banks raked in billions in profit and service providers increased and thrived. But the economy started to bleed because we were importing more than we were exporting. The petroleum, vehicles and their spare parts bill alone that we have to pay in dollars does not match what we get from our traditional Forex earners.
It is estimated that over 90 percent of unsecured loans are spent on conspicuous consumption such as home improvement, electronic, cars, phones and clothes. This is bad for the economy in the long run and worse when those things are imported.
There is a great lesson that the business community can learn from this situation. As business people since we are also consumers, we should be wary of getting into this trap. It is not good for our businesses, especially in this era of high interest rates.
We can’t shun away from borrowing money because we may need it desperately for smooth running of our businesses. But we must ensure it is spent on income generating projects. Think twice before moving to a more prestigious location, buying a better car or even upgrading your business machines. Do so if only it is adding monetary value, not just for prestige. If what you have is serving the purpose, move to the next step when you have earned enough rather than on credit. This makes business sense.