Rate capping pushes Kenya's overdraft rate to new low

Kenya's overdraft rate has dropped by 5 percent to a low of 13.5 percent following enactment of a law to cap lending charges.

Overdraft is money that an account holder owes a bank as he has withdrawn or debited from the account more than has been credited to it.

Latest Central Bank of Kenya (CBK) data show Tuesday that in January, the overdraft rate stood at an average of 18.5 percent, slightly higher than even the normal commercial bank loan rate, which averaged 18 percent.

But the ushering in of a new loan regime in September, which capped lending rates at 4 percent above the CBK rate that stands at 10 percent, became the game changer in Kenya's lending sector, bringing down the overdraft and normal loan rates.

Government and private businesses are the biggest beneficiaries of the overdraft loans, with the former borrowing money from the Central Bank while businesses from commercial banks.

The private businesses and individuals have been borrowing from commercial banks overdraft at as high as 40 percent, due to the risky nature of the loans. The capping of lending rates, therefore, comes as a big relief to businesses.

For government, the law allows it to withdraw from its Central Bank account an overdraft equal to 5 percent of the last audited annual revenues.

The overdraft, however, is calculated at the prevailing Central Bank rate, currently standing at 10 percent, making the loan cheaper than Treasury bills and bonds whose yields are determined by demand and supply.

With annual revenue collection standing at about 8.9 billion U.S. dollars, the Kenya government can withdraw up to 445 million dollars from the CBK as overdraft.

However, when the government borrows through overdraft, the move equals to printing more cash, which has the potential to causing inflationary pressure.

In the last two months, therefore, the government has cut down overdraft at the CBK, with analysts noting this was necessary as it had reached its limit. Endit