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Ratio Blog: Don't Hate the Banker

Wednesday, 03 March 2010

Or at least give the president a call before you hate your banker for charging you high rates. Why Kibaki should take another look at public spending before waxing on about low-interest rate policies. Andrea’s weekly column for the (Nairobi) Star.

Everybody loves to hate a banker. So easy. So satisfying, too. Money grabbing avatars of capitalism – bad, BAD! Fantastically hateable are of course the successors of Tom Wolfe’s Masters of the Universe in his ‘Bonfire of the Vanities’, those bankers who nearly brought down the global financial system, had to be bailed out by government with gazillions of dollars, and then still expected a full annual bonus for their kind efforts that can probably wipe out the external debt of a small developing nation.

Kenya’s financial sector has fewer acrobatic financial products, so the participation in the global financial carnage was limited. I remember Kenyan bankers looking quite smug and pleased with themselves and their – pat on shoulder – conservative lending policies. But even their conservative lending is still accompanied by high interest rates, and on that factor alone, they are targets for some light banker hating. So the Central Bank of Kenya governor usually gets a warm reception when he calls for lower interest rates. After all, isn’t it the fault of those greedy people that nobody can borrow affordably?

In steps the prez: “We must take policy initiatives that will reduce and maintain low interest rates,” reads President Mwai Kibaki’s speech for the opening of parliament. “This will enable Kenyans to access affordable credit for investments in wealth creation and expansion of employment opportunities.” True, true, sir. Double-digit interest rates can be a bit of a headache. And so we should be grateful for the president’s concern and initiative, right? Appreciate murmuring sounds all around.

But then one of Kenya’s bank MDs effectively handed this one back to the president: Actually, he said, we don’t really need to bother – not the least because banks can comfortably lend to Mr Kibaki at around 12%. Well, not to Mr Kibaki as such, but to government. And lending to government carries practically no risk and considerably lower transaction costs – so there is really no reason why banks would feel pushed to lend at any lower rate to individuals and companies. It makes little business sense. That’s without even discussing other factors inefficiencies in the banking sector, the large differential between lending and savings rates, limited reliable creditor information and difficulties in enforcing contracts.

And it does not look like Mr Kibaki’s administration will slow down on borrowing anytime soon. Tax revenues have taken a hit from the slowdown in growth: since early 2008, this was an unfortunate combinations of the disruptions from the post-election violence, drought and the global financial crisis. The last budget was expansionary to provide a stimulus to the economy – fair enough, but little of that promised investment has happened so far, and even less has materialised of Finance Minister Uhuru Kenyatta’s promised reduction in non-essential spending. There was some talk of cutting down on travel costs, phone bills, spending on hospitality and the like, but I suspect that a) nothing much has happened, and b) cutting down phone bills is all well and dandy, but not of too much consequence when regularly occurring scams across the board keep bleeding much larger sums.

And for that reason, Mwalimu Mati from MARS Group – the people who I will forever hold dear for eliciting the wildly, supremely casual ‘it’s a mere typo’ comment from Mr Kenyatta – have taken issue with a recent editorial that called for a speedy discussion and processing of a supplementary budget. The 2009/10 budget was the largest ever approved, they argue, but is in a reflection of poor planning and a lack of vision.

Tax collection, they say, is estimated at KES480bn and recurrent expenditures along are projected to reach KES606bn. This means that taxes won’t even pay for government’s bills. Where does the rest come from? Aid – unless, of course, donors decide that the overall squandering is getting a little too excessive, as they have done with financial support for the Free Primary Education programme. And borrowing. The KES10.7bn ‘typo’ may have driven the decision to carry out forensic audits of the last three national budgets, but no signs yet of any vigorous auditing in that direction. Nobody has been held to account for the big leaks, from AngloLeasing to maize or FPE. So MARS conclude: ‘If the government had fought corruption and ended extravagance, it would not require a supplementary budget.’ Nor, by extension, quite that much borrowing.

So, Mr President, what was that again about policies to lower interest rates? Care to take another look at your government’s public spending?

Republished with kind permission from the (Nairobi) Star.

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