Why Central Bank of Kenya Increased its Base Lending Rate:

The Central Bank Of Kenya (CBK) through its Monetary Policy Committee (MPC) last month increased it’s base lending rate (aka CBR) to 6.5% p.a. This is an open, innovative approach by the CBK, primarily expected to increase returns on savings for depositors from commercial banks and other deposit taking financial institutions.

However, besides this noble intention, the CBK was acting as the monetary and fiscal regulator to also achieve the following for the economy:

·        Tame excessive borrowing by individuals especially on personal loans-Banks in Kenya have of late been very aggressive in giving out personal consumer loans, partly because of holding huge amounts of cash, which triggers consumption.

·        Avoid creating a debt economy, which in turn which in turn can create a financial crisis like recently seen in USA and UAE. This kind of borrowing if not well managed or even controlled, can also have devastating effects on the economy by,   creating a debt economy. It is hoped that commercial banks will react by increasing their lending rates since their cost of funds will go up, and consequently reduce the number of customers taking up these consumer loans.

Have an enlightened day!!!