By Morris Aron

Direct market control will not lower lending rates, financial services charges, and the high interest rate spread.

Instead, creating a level playing field that allows for stiff competition among financial services providers is the answer to the current high charges. This is the verdict from finance experts who congregated last week during the launch of the Financial Sector Deepening (FSD) Kenya strategy launch for 2011-2015.

Speaking at the function, Central Bank Governor Njuguna Ndung'u said direct control of financial services charges and setting of interest rates by the market regulators has proved ineffective. He said he would work with industry players in the coming months to come up with initiatives that will spur competition in the sector, and push such costs down.

"From what I have seen over the years, increased competition in the financial services sector and financial literacy education have a general impact of reducing the costs of providing such services as institutions fight for customers," said Prof Ndung'u. Comments from Prof Ndung'u comes at a time when financial services providers seem to have turned a deaf ear to persistent calls â€" even from President Kibaki â€" that they lower their interest rates to spur economic growth.

Moral persuasion

The statement could be an indication that the market regulator is taking a much wider approach in dealing with the issue of high interest rates, and not relying on moral persuasion alone. David Ferrand, the director of FSD, stated that while there were a number of initiatives to address the issue of high interest rate spreads â€" referring to the margin between deposit rates and lending rates â€" such initiatives have failed.

He said the sector needed a wider and a more consultative way of dealing with the issue. "There is need that for us to tackle the issue of costs in the financial services industry by looking at ways to increase competition in the sector," said Mr Ferrand.

Kenya is one of the countries that has traditionally had an interest rate spread of above 10 per cent. In the recent past, however, banks have come under pressure to lower the spread with analysts saying that a majority of the banks, use the high spread difference is to maintain set profit margins. But banks insist that the spreads, lending rates and costs are high because of structural rigidities in the market that bring about risks that are factored in when calculating final figures.

Reduce risks

While the argument has held for a while now, recent trends indicate that there are a number of initiatives that have significantly reduced the risks, explaining recent calls from government and experts for the banks to reciprocate, and reduce their charges. Such initiatives include credit reference bureaus â€" that allows for sharing of credit background of customer â€" and information asymmetry in the sector.