Kenyan banks are expected to shy away from lending due to the cap on borrowing rate and a new set of global accounting rules.
The new accounting standards require banks to make higher loan loss provisions to withstand any possible shocks.
Barclays Bank of Kenya chief executive Jeremy Awori said with the coming into force of the new guidelines in January 2018 known as International Financial Reporting Standard 9 (IFRS), banks will be moving away from unsecured and small business loans towards government securities.
Data shows that banks have moved more than Ksh104 billion ($1 billion) of customer deposits into government securities since the capping law came to effect.
In a departure from the past, the new accounting standard, IFRS 9, will require banks to provide a certain amount of money on a loans based on historic credit on that particular portfolio in the lender’s books.
There will be a transitional increase in bank’s balance sheet provisions in line with the IFRS 9 requirements. Currently, loans are impaired based on the actual performance of the money borrowed.
“When you add that cost along with the interest rate cap, it makes it hard to get a decent return for banks. So you will find with a cap of 14 per cent and this impairment level is high and your returns now start becoming sub-optimal and it will actually be easier and less risky to invest in government security,” said Mr Awori at the sidelines of the third annual East Africa Investor Conference.
Regional lender Equity Bank last month announced it was also moving away from unsecured lending due to the IFRS 9, saying the use of historical ratio to make provisions at the point of booking the loans was not sustainable with a margin of seven per cent.
According to CBK data, growth of credit to the private sector fell to 2.1 per cent over the 12 months to May 2017, blamed on the rate caps and pre-election jitters.
The Central Bank of Kenya is also in the process of reviewing the interest rate cap. But CBK Governor Patrick Njoroge has warned that if the law were repealed, banks would need to be disciplined not to charge the high interest rates that they have been charging before the ceiling was put.
“CBK’s study on impact on the interest rate cap has progressed and it is clear to us that capping has been problematic in many ways and going forward we will reverse the measures and let ourselves go back to a regime with freely determined interest rates but in a disciplined environment,” said Dr Njoroge.
Mr Awori was also of the same opinion saying: “The banking industry is mindful that even if the law is revised or reviewed we are not going back to the days where the interest was high, so we need to try and keep interest rate at low as possible to extend credit to the consumers.”
Last year’s capping of interest rates shaved Ksh26.3 billion ($255.6 million) off commercial banks’ lending income in the first six months of the year, setting the lenders up for lower profitability this year.
The capping law into effect in September 2016, limiting interest charges to a maximum of four percentage points above the prevailing Central Bank Rate, currently standing at 10 per cent.