Bloomberg News

Kenya Sees Credit Blowback as Central Bank Pressures Lenders

September 13, 2011

(Adds new shilling low in third paragraph.)

Sept. 13 (Bloomberg) -- Kenya’s Central Bank Governor Njuguna Ndung’u is waging a battle with Standard Bank Group Ltd. and other lenders to force them to boost loans to support a drought-ravaged economy. His moves are having the opposite effect.

The central bank in August restricted liquidity to commercial banks to prevent them from speculating in the currency market, forcing borrowing costs up by more than 20 percentage points within two weeks. The decision followed a January rate cut even as inflation was accelerating.

Investors are losing faith in Ndung’u’s ability to manage the crisis as a rift between the central bank and commercial lenders widens, clouding the outlook for East Africa’s wealthiest nation. The shilling today fell to a 17-year low against the dollar.

“The biggest impact has been on confidence,” Yvonne Mhango, a sub-Saharan economist at Moscow-based investment bank Renaissance Group said in a telephone interview from Johannesburg. “We’ve seen quite a few policy movements and a lack of clarity.”

Ndung’u, 52, views it differently. He says he’s penalizing banks for borrowing cheaply from the central bank and investing in higher-yielding Treasury bills rather than boosting lending. He spoke in an interview at his office in the capital, Nairobi.

Drought Impact

Standard Chartered Plc, Standard Bank and other banks conduct analysis of Kenya “not because they have knowledge of the economy, but they are writing to confirm the business model that the bank wanted,” said Ndung’u, who pulled out a printout of inflation graphs in the interview to make his point.

“In the short term no one wants to let go of their portfolio,” he said. “The best option is to close any window of arbitrage.”

The worst regional drought in 60 years has boosted food and energy costs in East Africa’s largest economy and forced thousands of Somalis to seek refuge from famine in neighboring Kenya.

Kenyan inflation soared to 16.7 percent, more than triple the central bank’s 5 percent goal, and the shilling has plunged 15 percent against the dollar this year, reaching a low of 95.80. Foreign investors more than doubled sales of equities in the second quarter compared with the previous three months.

“The cost of living is rising dramatically, and the government and central bank have a difficult task to control that,” Robert Shaw, founder of the Kenya Institute for Economic Affairs, said by phone from Nairobi. “It’s a very dangerous time for the central bank governor and the commercial banks to be at loggerheads.”

Credit Rating

Fitch Ratings said on Aug. 12 that failure to rein in inflation and stem the currency’s depreciation threatens Kenya’s B+ credit rating. Drought and rising costs are “downside risks” to the government’s goal of about 5.6 percent growth this year, Finance Ministry Permanent Secretary Joseph Kinyua said on Sept. 8.

Barclays Plc’s Kenyan unit raised its main borrowing rate by 1 percentage point to 14.75 percent on Sept. 1, restricting credit demand in a country where annual per capita income is $780, according to the World Bank. Kenya Commercial Bank Ltd. and NIC Bank Ltd. are among other lenders that have also revised their base lending rates in the past two months.

The crisis is Ndung’u’s biggest challenge since he was appointed to the position in 2007. As the only university graduate out of a polygamist family of 19 children, the governor defied the odds of poverty and overcrowded classes near his birthplace of Murang’a, in central Kenya, to earn a doctorate in economics from the University of Gothenburg in Sweden.

Economics Professor

Before moving to the central bank he taught economics at the University of Nairobi and was in charge of training at the African Economic Research Consortium in Nairobi.

The back-and-forth began in January, when the central bank unexpectedly cut its policy rate by 25 basis points to 5.75 percent even as forecasts showed inflation would soar. Investors dumped Kenyan assets and the shilling began depreciating, prompting the central bank to reverse the rate cut two months later.

The action failed to stem the shilling’s slide. Suspecting banks were speculating in the currency market, the central bank audited the foreign exchange transactions of commercial lenders in June. Four banks had “very large overseas positions,” while the volume of borrowing from the central bank had climbed, the governor said on June 23.

‘Pretty Risky’

Ndung’u responded by restricting liquidity. The bank changed the calculation of the overnight discount window rate, which lenders use to borrow from commercial banks, four times within two months, raising it to 31.4 percent on Aug. 26.

“None of that was proven to be successful in preventing the currency’s depreciation because policy was changed so frequently,” Razia Khan, head of Africa economic research at Standard Chartered, said in a phone interview from London. “Restricting access to borrowing is a pretty risky way of effecting tightening.”

London-based Standard Chartered, the U.K.’s second-largest bank by market value, isn’t in a position to comment on the governor’s statement at this time, Annie Kinuthia, head of corporate affairs for East Africa, said in a phone interview from Nairobi yesterday.

Johannesburg-based Standard Bank, the largest lender in Africa, “has the greatest respect for the central bank governor and his views,” the bank said in a statement. “We ensure that we adhere and conform to both local and international requirements on governance and compliance in Kenya.”

Liquidity Crunch

Recent steps taken by the government have helped to ease the liquidity crunch, with interbank interest rates dropping to 5.66 percent as of Sept. 9. The central bank will have a special monetary policy committee meeting tomorrow to review its action.

Finance Minister Uhuru Kenyatta held three meetings since August with executives from lenders including Kenya Commercial Bank, Equity Bank Ltd. and Standard Chartered to help mend rifts, a Treasury official, who declined to be identified because the outcome of the discussions haven’t been made public, said on Sept. 7.

President Mwai Kibaki said on Sept. 8 the government asked the International Monetary Fund to provide funds to help boost Kenya’s foreign currency reserves and offset the impact of the sliding currency.

The central bank’s credibility in controlling inflation and managing crises may be irreparably damaged, said Philippe de Pontet, a director at Washington-based Eurasia Group.

Even with the banks’ recent measures,“The incoherence of its rate policy, fixation on speculation and seeming unwillingness to take necessary steps to curb inflation calls into question its overall strategy, or lack thereof,” he said in a research note.

--Editors: Nasreen Seria, Anne Swardson

To contact the reporters on this story: Sarah McGregor in Nairobi at or;

To contact the editor responsible for this story: Andrew J. Barden at

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