Written by Antony Ragui
September 19, 2008: The recent slowdown of the global economy occasioned by the meltdown of the sub-prime mortgage market in the US, the increase in World Oil prices and the ensuing credit crunch has been a major concern for economists the world over.
The issue in the past was would this crisis of the US markets affect our economy? Now we are asking, when will the full effects of this crisis hit our economy and how severe will they be?
The US market being in recession is a reason for other countries to safeguard themselves. Being the largest economy in the world, a slow-down in this consumption due to the credit crunch and recession will have a direct impact on all economies that directly export to US.
In Kenya, the slowing of the US economy as well as the increase in oil prices has had a direct effect on inflation.
The post-election violence led to a disruption of price mechanisms by having a direct impact on supply of goods and services by negatively affecting transport around the country. What does this inflation mean to financial institutions? There is reduced ‘supply’ of deposits as savings reduce and a general increase in cost of living.
Credit demandOn the other hand, there is a corresponding rise in the cost of doing business, leading to an increase in demand for money from these same commercial banks.
What then are the alternatives for banks?
CBK and the government have asked commercial banks to be patient and keep the interest rates constant. So far this has worked, but the lenders will soon be faced with reduced deposits and increased defaults on current loans as global economies slow down.
There is a solution to this: Credit bureau, Credit reference agency, credit information services or credit registries. Developing and developed economies world over have used these institutions to accurately price risk and aid in decisioning by providing a holistic view of the borrower, leveraging on shared information from other industries, and hence creating a robust information system.
Our banks are yet to begin information sharing. In July 2008, the amendment to the Banking Act allowing for licensing of credit bureaus was gazetted. This exercise of sharing of borrowers’ information will not happen until early next year.
In the meantime, banks will have to contend with increased default risk and tightened internal controls as they await the commencement of the legislation and advent of this information age.
Ragui is the managing director, Quest Risk Solutions Ltd.