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Mixed fortunes for banking as Kenya, Rwanda vote in August

Wednesday February 22 2017

With elections on the horizon and the effects of interest rate caps kicking in, the region’s banking sector is facing mixed fortunes, as analysts warn of stormy times ahead.

Kenya, the region’s biggest economy and Rwanda, the bloc’s star business reformer, will both hold presidential elections in August this year, events that are expected to stimulate liquidity but also minimise investor appetite.

Although both countries will hold elections, the impact on the sector is expected to be slightly different.

“In Kenya, there is a wait-and-see attitude by investors This means they will not be dispatching new investments so this is likely to depress the sector. In Rwanda, it could be a bit different because Rwanda’s elections are not normally disruptive, but an election year is one of anxiety nonetheless,” said Maurice Toroitich, managing director of KCB Rwanda could and head of the Rwanda Bankers Association.

Kenyan banks are struggling to cope with interest rate cap measure taken by the government to reduce the cost of borrowing for the country’s private sector, with some experts terming it as “a massive own goal.”

The caps were fixed at a maximum of 4 percentage points above the Central Bank’s base-lending rate, bringing the maximum lending rate to 14 per cent.

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Consequence

As a consequence, 11 listed Kenyan bank stocks have plunged by an average of 14 per cent, with further stock falls expected to happen in the coming months. “Wait until they release numbers for 2016, dividend cuts, single digits growth,” noted a financial commentator on Twitter.

Although Kenya’s economy has been reported to have been spared the effects of the slump in commodity prices that ravaged commodity based economies, the cap is proving to be the Achilles heel for its growth this year, expected to slow to 5.7 per cent or lower in 2017.

Reports indicate that KCB fell 2 per cent on Wednesday to push losses over the past 12 months to 37 per cent, while Equity Group rose 0.9 per cent, but its 12-month decline still stands at 32 per cent.

The volatility in the financial sector cut across the region, with Rwanda grappling to stem a growing trend of non-performing loans — expected to grow by 8.5 per cent in 2017, while lenders in Uganda are faced with high lending rates.

“With the lending rate cap in Kenya and high interest rates in Uganda, banks will have to adopt more technology based delivery options to make banking affordable to the consumer, and also cut costs”

“Banks are cutting branches and reducing human resource,” said Mr Toroitich. Players are casting a positive forecast for Rwanda’s banking sector, predicting more growth in the coming months, coming from the expected surge in liquidity as a result of increased election spending.

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