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The East African : March 17th 2014
The EastAfrican 48 CREDIT UPTAKE EXPECTED TO RISE Lending rates in three-year low, as deposits cost less CBK says inte≥est cha≥ged on bank loans fell to an ave≥age of 15.84pc in Janua≥y, a level last seen in 2011 By PETERSON THIONG’O The EastAfrican L ending rates in Kenya have fallen to a new three-year low, rais- ing hopes among commercial banks of a better credit uptake this year. Data from the Central Bank of Kenya (CBK) shows interest rates charged on bank loans fell to an average of 15.84 per cent in January — a level last seen in 2011 — as banks adjusted their rates downwards to reflect the falling cost of deposits. According to the latest CBK Mar- ket Perceptions Survey seen by The EastAfrican, lenders said the falling cost of credit coupled with increased economic activity will see credit expand by a quarter this year, up from 17 per cent last year. “Banks expect to increase credit by about 25.8 per cent while demand from the private sector is expected to increase by about 20.5 per cent due to increased demand to finance imports and increased demand from SMEs,” said the CBK. The fall in rates has seen banks in Kenya open a wide gap over their peers. In Uganda, borrowers are paying at least 23 per cent interest on loans, while in Rwanda and Burundi, they are paying an average of 20 per cent. Banks in Tanzania are charging at least 21 per cent interest on loans. Banks expect the lending inter- est rates to decline or remain stable in the remainder of 2014 largely reflecting increased competition in the loans market, and expected easing in pressure on Treasury securi- ties due to the planned issuance of the $1.5-2 billion Eurobond. Large banks expect lower aver- age lending rates in the remainder of 2014 due to a lower cost of funds. The regulator, in the survey conducted by the Monetary Policy Committee (MPC), an organ of the central bank, notes that interest paid on deposits fell to an average of 6.82 per cent in January, from 6.88 per cent in December 2013, as banks reduced the amount they paid to customers for their deposits, partly due to a fall in inflation rates and increased mobilisation of cheap deposits from new avenues like agency and mobile banking. Though rates continued on a downward trend, analysts warn that any delay in issuing the country’s debut Eurobond could see the government increase domestic borrowing, a move that could put pressure on treasury yields and indirectly raise the commercial rates in the country. The Eurobond deal was expected to be complete by the end of this month, but it seems unlikely as the government awaits the passage of an amendment to the Public Finance Management Bill, to allow for the issuing of Eurobonds. The Bill was approved by the relevant committee but is yet to go through parliament. The CBK data shows that though banks have continued to squeeze their interest spread — the difference between the amount their charge as interest for loans and BUSINESS MARCH 15-21,2014 in b≥ief KCB enters Islamic banking segment Regional lender KCB is set to roll out Islamic banking in the Kenyan market, after a similar launch in Tanzania. It joins National Bank, Barclays and Standard Chartered that are already offering Shariacompliant banking. “We plan to launch five products in the first phase which will be up and running by July this year and then later on introduce more products in the fourth quarter of the year,” said Islamic banking general manager Jaafar Abdulkadir. Modern methods needed to stop bank fraud A banking hall at a branch of Kenya’s Equity Bank in Nairobi. Picture: File HIGH COST OF BORROWING While CBK has reduced the benchmark interest rate from 18 per cent to 8.5 per cent over the past three years, banks in Kenya have on average reduced their base lending rates by only 5 per cent. CBK has formed a committee to examine the cause of the high interest rates. what they pay on deposits — it still remains the highest in the region. Interest spread stood at 9 per cent in January, which is higher than Tanzania’s 2.42 per cent. Analysts at Deloitte, the consult- ing firm, say that though banks are gradually easing their lending rates they still are adopting a cautious approach. While the MPC has reduced the benchmark interest rate from 18 per cent to 8.5 per cent over the past Experts cite the high yields on government papers, lack of adequate collateral by borrowers and dependence on interest income by bankers as some of the reasons. Analysts say the banking sector needs to move more towards a lean operating model hinged on greater adoption of technology and a more prudent deployment of staff. three years, banks have on average reduced their base lending rates by only 5 per cent. “On the other hand, they have reduced deposit rates by an average of 10 per cent. Theoretically, this should reflect an increase in spreads, however, depending on the mix of deposits and customer profiles interest spreads have eased slightly for most banks,” said Sadiq Merali, the associate director of financial services at Deloitte. Anothe≥ low-cost ai≥line expected in Da≥ this yea≥ THE FOUNDER of Fly540 is set to launch a low-cost airline in Tanzania later this year, in a move expected to raise competition in East Africa’s skies and drive down fares. Don Smith said he had hired Brown Fran- cis, a former senior executive at rival Fastjet, to head the new airline, putting him in direct competition with Fastjet, Air Tanzania and Precision Air for a slice of the domestic aviation market. Fly-Sax, which operates charter flights in Kenya, said it was awaiting regulatory clearance before starting operations in Tanzania. “We anticipate getting approval in the second half of the year. We are hoping it to be operational as early as the third quarter of 2014,” a spokesman for Mr Smith said via e-mail. Mr Smith said the airline would seek to tap into Tanzania’s tourism market by offering do- mestic flights on routes like Mwanza, Kilimanjaro, Zanzibar and Mtwara using three 50-seater CRJ planes. “We shall offer a combination of low-cost and charter fights,” he added. The entry of Fly-Sax in the low cost carrier market pushes the number of budget airlines in the region to three. The other two are FastJet and JamboJet, which is expected to start operations on April 1. But, given the size of the planes Fly-Sax is proposing to use vis-a-vis competitors like Fastjet, who use the A319, and considering that By running an efficient and costeffective airline, we can ensure that our prices remain competitive. Spokesman for Don Smith, the man behind Fly-Sax load factors in the region average 75 per cent, will it be economically possible for the firm to run a low-cost carrier? “We are not seeking to be in competition with any airline. Our main reason for choosing the fleet that we did was to have greater frequency of flights. Also, by running an efficient and cost-effective airline, we can ensure that our prices remain competitive,” said the spokesman. Fastjet’s A319 planes carry between 145-156 passengers. JamboJet is proposing to use the B737 configured to carry 146 passengers, having ditched earlier plans to use its Embarers E-190 which carries 96 passengers arguing that this would translate to a relatively higher fixed cost per passenger making it harder to offer low prices. By Peterson Thiong’o Players in the financial services industry need to put in place strong security controls to stem the rising cases of fraud in East Africa. Speaking at the launch of the Deloitte 2013 Financial Crimes Survey report in Kampala recently, the firm’s director if forensic and litigation, Robert Nyamu, support said banks had failed to put in place high-tech controls that match the innovative products on the market. The report says Uganda loses up to $10 million annually to fraud, while Kenya and Tanzania lose more than $10 million each. EADB wants region to phase out tax breaks Vivienne Yeda, EADB directorgeneral. Picture: Diana Ngila The East African Development Bank (EADB) wants countries in the region to phase out numerous tax concessions and excessive incentives introduced in the 1980s and 1990s, as they deny the host country “revenue and other critical resources.” EADB director-general Vivienne Yeda said the quest for maximum profits by foreign investors and the host country’s expectation for high returns, skills transfer, infrastructure development and job creation are sometimes at variance. Good outlook for farmers as rains start The agricultural sector in East Africa is expected to record a strong performance this year due to adequate rainfall this season, latest forecasts by meteorologists show. According to predictions, Rwanda, Burundi, large parts of Tanzania and Uganda, as well as central and western parts of Kenya are expected to experience normal and above normal rainfall. Northern, eastern and coastal areas of the Greater Horn of Africa are expected to experience normal to below normal rainfall.
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