The financial markets are in a tumultuous whirlwind. From the Euro zone to sub Saharan Africa, it is all about the making of a h********s financial c****s.

Kenya has seen unprecedented hike on the interest rates in desperate efforts to save the local currency from the marauding “hard” currencies.

The Central bank in an extraordinary move recently increased the Central Bank Rate, its benchmark lending rate, by a whopping 500 basis points.

The philosophy behind the tightening of the monetary policy was to rein-in a trodden shilling, and runaway inflation rate that hit a high of 18.9 in October this year. As expected, the reaction was swift and furious and indeed majority of the commercial banks have increased the lending rates.

The major players in the market have put the base lending rates above the 20% mark with Commercial Bank of Africa joining the fray at a high of 24%. In simple terms, a bank’s base lending rate is the minimum rate that a bank is expected to charge to cater for cost of funds and some administrative costs.

The bank therefore adds a risk premium for the risk assumed. Usually, the risk premium oscillates in one to five percent bracket making a loan’s lending rate to be close to 30%. This is quite expensive and easily comparable with what money “Shylocks” would charge you for money loaned. But if you thought this is only happening in Kenya: Hold a bit.

Nigeria and Uganda have made similar moves in attempts to contain the massive run in their local currencies. Central Bank of Nigeria raised the monetary policy rate by 275 basis points from 9.25 percent to 12 percent. It also the cash reserve ratio was increased from 4 to 8 percent. The Bank of Uganda recently tightened its monetary policy by increasing the central Bank rate to 16% to help to a****t the mounting inflation rate which now stands at 21.4%.

hese are just some African examples that elucidate the sorry state. Who would have thought that some seemingly strong European economies would be glaring at debt default? This is the stuff expected to be seen in Africa and Africa only. But Greece has triggered a flurry of activity to redeem its seemingly eroding ability to service its debts. The consequences are far-reaching and are expected to may destabilize the entire Euro Zone.

This explains the desperate efforts from Germany and France to ensure that Greece agrees to the set austerity pills that seems too bitter to swallow. There has been a huge debate on whether monetary policy really works. Is it largely a balance of some sorts? Where by tightening one aspect you let loose another. Talk of a double-edged sword. Monetary policy actions usually impact real interest rates, which in turn affect demand and eventually output, employment, and inflation. Take Kenya for example, what are the likely impacts of the changes in the monetary policy.

True, this has shown positives in taming the volatility and depreciation of the Kenya Shilling against the hard currencies especially the US Dollar. Coupled with the current rains, CBK’s action may substantially reign in on the runaway inflation. However, the increase in bank lending rates will have huge adverse impacts on the economy.

The growth in Nonperforming loans is a reality the banking sector must live with largely buoyed by ‘debt fatigue’ from the borrowers forced to pay more due to hike in the interest rates. Slowdown in the bank lending can decelerate the developments that were in the pipeline as developers adopt a wait-and-see attitude. This effectively will make the government revise downwards the GDP growth prospects as well. An agile institution with robust risk management systems must be on the lookout.

As an astute risk manager in a commercial bank must put in place systems to manage the inherent risks especially regarding credit risk and foreign currency risk management. The English say, “Every cloud has a silver lining.” It is those who will put in place robust risk management structures and strategies that will avert the evidently possible losses and make satisfying returns.

Macharia Kihuro Is a Risk Management Practitioner at Panafrican Housing Financial institution, Shelter Afrique, headquartered in Nairobi. [email protected]


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