The interest rate caps effected in Kenya in September last year have not turned out to be the disaster that banks — with the tacit approval of the regulator and the World Bank — had been shouting from the rooftops they would be.
Their word is now being discredited by data released by the Central Bank last week, when it explained the Monetary Policy Committee’s decision to retain the distress lending rate at 10 per cent.
Poring through the slides unearths some telling truths.
First, the average lending rate has consistently fallen, from 13.86 per cent in August last year to 13.61 per cent at the end of April. The low rates comprised an invitation to lend with loan requests and approvals increasing by nearly a quarter (23.6 per cent) and more than a third (35.7 per cent), respectively. The only drawback was that the value of the applications and approvals decreased by 18.3 per cent and 16.3 per cent, respectively.
Second, the tables have been turned with regard to which banks are the most expensive to borrow from. Before the rate caps (they require loans to be given at four percentage points above the policy rate, and deposit rates at 70 per cent of the policy rate), smaller banks had the highest cost of credit. However, larger banks have now taken that unwanted, if profitable, title.
Related to this is that the gap between the most expensive and most affordable lenders has narrowed from one percentage point pre-cap to 29 basis points post-cap, with big banks lending at 13.61 per cent, medium banks at 13.42 per cent and small banks at 13.32 per cent. This suggests tighter competition in the sector, as Members of Parliament had hoped when they passed the law capping interest rates.
Third, credit to all sectors of the economy — with the exception of mining and quarrying, agriculture, financial services and trade — increased during the period.
Overall, lending grew marginally by 1.33 per cent, but it would be difficult for bankers to argue that the sectors whose uptake of credit fell was solely because of rate caps.
Fourth, although lending to micro, small and medium enterprises fell by 5.7 per cent, small banks actually increased exposure in the segment. This points to possible segmentation of the credit market with big banks focusing on corporates.
What do these facts mean? Like with all new regulations, the interest rate caps caused uncertainty in the market as borrowers and lenders took time to assess its implications.
Eight months of watching have yielded discernible trends that suggest that rate caps will be good in the medium term.
At the MPC briefing, Central Bank Governor Patrick Njoroge said in his off-the-cuff remarks that lending to the small scale sector was picking up, and that this could be the last drop being reported.
An executive of a leading bank intimated after release of the bank’s first quarter results that credit was actually expected to increase in the current quarter ending in June.
In short, even banks do not believe their demonisation of rate caps, which they appear to have crafted to lobby for a review of the law that squeezed their operating margin by half. To help the rate caps achieve their full effect in the market, the government, through the Central Bank, should drastically curtail domestic borrowing.
That way, banks will be left with less risk-free lending (government securities) on the table and be forced to support the productive sector. That could be helped by the government’s recent appetite for money that has left it at only Ksh5 billion ($50 million) away from the domestic debt ceiling.
Although a survey of credit managers indicated that banks were focusing more on fees and commissions, secured lending, and diversification of revenue streams through digitisation, it is unlikely they will ignore the core of their businesses as liquidity swells in their vaults.