BY VICTOR ADAR
As recent as a year ago, banks charged an average of 18% on loans. Some passed exorbitant percentages of as high as 27% to borrowers. Today, the maximum interest charged by banks is less than 14%, yet bottom up economy is not strong. Experts say that from manufacturing to trade, real estate to transport, as well as agriculture, which are the biggest contributor to Kenya’s economic growth, have not benefited from credit after the country re-introduced interest rate capping law that was scrapped in 1991.
Asset management firm, Britam, reveals that the drive to lower interest rate has affected credit growth so much that should the current law be revised things will turn worse for borrowers as banks will now have the freedom to price for credit risks, a move that will largely hurt the private sector.
According to the chief executive of Britam, Kenneth Kaniu, the high interest rate was as a result of liquidity crunch coupled with bad asset quality. This scenario made banks look at private sector borrowers as a risky lot, and hiking the rates was a lot like the better way of lowering those risks. As such, a smart move was to lend to Government.
“We’ve seen a pull back from lending to SMEs,” says Kaniu. “Expensive credit is coming back to the economy. You have access but interest is high. It’s a catch-22 situation where when the rates are low, banks are not lending. Now the interest rate is good but banks can’t lend, that acts as a barrier for companies to access credit. And right now it’s not as flexible to individual borrowers. What we see is that banks have become averse to lending”
Analysts, however, argue that things will take shape only after key issues such as increased loan loss provisioning and the pricing of deposits framework has been dealt with. This challenging operating environment will transition the industry into one with fewer, but stable banks, leading to a more efficient and stable banking sector.
Maurice Oduor, Cytonn’s Investments Manager says: “We are seeing banks adopting a more disciplined approach, following rising non-performing loans and the capping of interest rates, while also employing cost rationalization measures in a bid to enhance efficiency under the current operating environment.”
Mr Oduor’s sentiments are echoed by Caleb Mugendi, an investment analyst, who says that the banking sector will continue to witness increased consolidation, given that the industry is expected to become more stable where only the banks with a strong competitive advantage, either in capitalisation, deposit gathering or niche, shall see light of the day. The sorry state of affairs makes investing hard as an investor is not in a position to tell next move of a bank, and vice versa.
“We are already witnessing increased consolidation in the banking sector, with smaller, uncompetitive banks being acquired, and the entrance of large global banks, such as Dubai Islamic Bank, and global suitors for Chase Bank,” says Mugendi.
Kenya’s private sector credit landscape which grew at 5.1% in 2016 and reduced by 1.5% in the first seven months of this year, becoming the first downward trend in the last seven years – whether an intervention measure like interest rate capping law that was expected to change things for the better will live up to the expectations still remains to be seen.
Funny, Uganda, shares the same scenario reporting lowest point in March 2016 where its credit growth contracted by 1.2%, a percentage that has since recovered to 0.2% growth in the first six months of this year. This is happening despite the fact that from 2012 to 2015 there was some ease when Uganda lowered CBR from 17 to 11% reducing most credit being charged on loans to around 21%. But what will really work for Kenya? Will the old way where lenders are free to price loans based on market dynamics help banks regain appetite in loaning out private players who are already starved of credit? Will a rate cap repeal change things for the better?
Strict regulations, political uncertainty and tough business environment are some of the reasons cited by lenders with regards to the call for a review of the current law, and should the a green light from the CBK in conjunction with the National Treasury and Parliament , the era where borrowers are at the mercy of banks will start again.
Although there is 5 to 6% growth as far as gross domestic product is concerned, the strong impact is not being felt on the ground. Actually, it doesn’t take rocket science to know that the economy is slowing down with incidences of debt service also going up at 9%, which is double what was recorded two years ago as banks stop lending.
Mr Kaniu says: “Growth has slowed down because people are not spending. Companies are also not keen to spend, and the banks won’t lend. All these as a result of monetary policy effects (like interest rate capping law), infrastructure spend which comes at a high cost, and asset quality effects. Fiscal spending needs to be addressed to avoid the crowding out of private sector. What we see now is many companies slowing down, and people are not spending.”
At a time when efforts are made to promote strong economy, agriculture, manufacturing and real estate are some of the sectors starved of credit. Agriculture, the mainstay of the economy is one sector that is lagging behind thanks to unpredictable weather patterns that the country have experienced as well as weak consumer demand of farm produce.
Construction sector on the other hand, has been struggling due to delay in government payments. But how has government spending affected the economy?
Kaniu says: “If sectors that were once driving economy can’t access credit, there will be no growth. That’s why it is good to formalise agriculture by empowering small scale farmers now performing poorly because they can’t access loans by converting them into enterprises.”
There’s reprieve when government turns to outside borrowing (which is good for the private sector) so that economic growth can be boosted from both sides. When private sector is getting enough credit and government engaging in foreign borrowing, the private sector will do better. For private sector to improve and expand, it has to use credit to contribute to the GDP. Government spending, at the moment, is the only contributor to the current economic growth.
The forces that have pushed up the appeal for lenders are really weakening given the fact that business environment has not been that favourable – going for loans is a tall order, and transitioning to a more disciplined and efficient sector has meant that banks must remain attractive and stable for investment in order to entice customers.
Latest Kenya Banking Sector Report show that listed banks recorded a 13.8% decline in core Earnings Per Share growth, compared to a growth of 15.5% in H1’2016. The poor performance was primarily on the back of an 8.1% decline in Net Interest Income (NII) following the capping of interest rates.
KCB Group for example, was the only bank that recorded growth in NII, a 2.9%, following a 20.8% decline in interest expense, as the bank managed to contain its cost of funding. Deposits grew at 14.4% during the first half of the year, a faster rate than loans, which grew by 9.3%. The loan growth came in lower as private sector credit growth slowed to 2.1% in H1’2017, below the government’s set target of 18.3%, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books. Consequently, allocation to government securities rose to 32.2% from 29.4% last year.