BY LUKE MULUNDA
A few days after MPs passed the Bill capping interest rates, bankers suddenly turned into money angels, promising to lend up to Sh30 billion to small and medium sized enterprises at friendly interest rates. But that offer did not sway President Uhuru Kenyatta or the legislators.
With that signature, the President pushed placed a control valve on the banks’ biggest pipeline of revenues, and spelt doom to the mega profits that have been witnessed in the financial sector even during economic downtimes.
Financial institutions have been making massive profits from loans and advances. Statistics from Central Bank of Kenya (CBK) from 2010 to 2015 indicate that banking industry profits have been rising steadily even as expensive loans choked many households and small-medium enterprises (SMEs).
In 2010, the data shows that banks recorded pre-tax profit of Sh74.3 billion which was a 51.9% increase from the previous year. In 2011, the pre-tax profit shot to Sh89.5% while in 2012 banks registered Sh107.9 billion profits and Sh141.1 billion in 2013. The situation was no different in 2014 and last year, which saw banks rake in a whopping Sh456.8 billion in pre-tax profits and 2016 could well turned out to be a record-breaking one given the figures already released for the half-year.
Although bank managers attribute the growth in profits to diversification of products, loans contributed a huge chunk of the profits. The growth was largely supported by the expansion in the credit portfolio, investment in government securities and commissions and earnings from foreign exchange trading.
Under the law, interest rates will drop to a maximum of 14.5% given the CBR has been set at 10.5%, with a ceiling of 400 basis points above it. Banks will also pay depositors 7.35% interest, from as low as 2%, which will result in the lowest interest rate spreads since the country liberalised its financial markets in the early 1990s.
At 14.5%, the interest rates will be significantly lower than the current average lending rate of 20%, and nearly 10% cheaper for those currently servicing personal unsecured loans at an annual rate of 24%.
“The new law will cause a decline in net interest margins by at least 200 basis points, causing banks to charge other fees to customers to make up for the lost income,” said Alistair Gould, chief executive officer of African Alliance Ltd’s Nairobi-based unit. “We expect reduced earnings growth from banks in the medium-term, which could further dampen sentiment towards the listed banks on the Nairobi Securities Exchange.”
But the bigger issue in the whole matter of interest rates control is where all this leaves the borrower who has been oppressed by what has come to be known as greedy banks. Kenyans will be keenly waiting for the direction from the Attorney General, but the stage has been set for new charges and commissions by banks to fill the gap left by a drop in the cost of credit.
Analysts say banks won’t take the pain lying down, but will hit back silently and pun high-risk borrowers by choking off credit to them. The era of unsecured personal loans seems to have come to an end and SMEs will struggle to convince banks to lend to them.
In fact, a number of banks have already restricted process of loan applications. A memo doing rounds on social media from one of the banks to retail managers suspended lending on personal unsecured loans, motor loans and emergency cash just hours after President Uhuru assented to the Bill.
Mr Mohamed Wehliye, an expert on banking, warned that the new law will make life harder for Kenyan borrowers. “Banks will now demand for loan insurance and introduce other fees which will make the lending rate very opaque. Go to any bank and see whether they will lend to you at 14.5%. You won’t even get it at 18%,” he said.
The other fundamental question is: Does regulating banks open up the era of cheap loans?
However much it hurts banks, the Act appears to solve only half the problem. The amendments in the law target commercial banks under the Banking Act and leaves out other players that trade loans for a profit inform of interest rates. Microfinance institutions, Saccos, mortgage firms and mobile phone loan transactions (as well as shylocks) are not covered. Microfinance banks are licensed and regulated under the Microfinance Act 2016, Saccos under the Sacco Societies Act, while mobile financial services have their own regulation ecosystem.
A majority of Kenyans access credit through microfinance institutions some of which charge higher interest rates than banks of up to 25%. The numbers say it all. The microfinance sector loans grew from Sh47.1 billion in December 2015 to Sh49.1 billion in June 2016, while mortgages expanded from Sh54.6 billion to Sh55.7 billion. CBK records show total gross loans through mobile phone platforms hit Sh15.04 billion as at April 2016.
Market watchers say any attempt to regulate the credit market must include both banking and the non-banking sectors. Credit vendors have been unable to regulate themselves including the Kenya Bankers Association and cannot be left to the forces of supply and demand.
The main issue has been personal/consumer loans, which are currently over-priced in both bank and non-bank segments. The Kenya Banks Reference Rate has been ignored by banks, which have always preyed on individuals and businesses. To even the playing field, MPs may have to pass more Bills to fix Saccos and microfinance institutions.
But before they do that, a few questions to ponder. What, for instance, will happen to old loans and deposits? Will interest rates on loans drop immediately as interest on deposit go up?
The new law, as it were, caps interest on deposits at 70% of the base rate. The implementation schedule was not immediately clear. But Kenya Bankers accepted the reality. “The Bill has been signed into law. Our job is now to comply,” said its Chief Executive Habil Olaka.
To complicate matters for borrowers who expected instant impact, the bill was signed with an unresolved ambiguity on the base rate that would be used to determine the caps.
The law moved by Kiambu Town MP Jude Njomo reads thus: “A bank or financial institution shall set (a) The maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent the base rate set and published by the Central Bank of Kenya. (b) Minimum interest rate granted on a deposit held in interest earning in Kenya to at least seventy per cent the base rate.”
While Njomo has insisted that the base rate he was referring to when he drafted the law was the Central Bank Rate, Central Bank of Kenya designates Kenya Bankers Reference Rate as the base rate. Olaka says it’s not clear to the banks which rate will be used to set the lending rates. “We will have to look at the new law to understand which rate will be used to determine lending rate,” he said.
Borrowers too will have to study the new law to find out if, indeed, their side of the bread is buttered.
