The winners and losers under Kenya’s interest rate capping regime

Wednesday August 09 2017

Commercial banks have chosen to pump money into Treasury Bills that offer risk-free returns of eight per cent in three months, 10 per cent in six months and about 11 per cent in one year. FOTOSEARCH


The debate on whether Kenya is ready for a controlled interest rate regime has been raging since the government enforced the controversial law in September last year. But who are the winners and losers under the new regime?

The EastAfrican reviewed the impact of the law on select sectors, amid talks of abolishing the legislation.

First and foremost, the government has been the major beneficiary of funds in the banking industry in terms of its borrowing from the domestic market to fund its budget deficit, while existing borrowers and mortgage owners have seen their cost of loans revised downwards in tandem with the new interest rate framework.

Commercial banks have chosen to pump money into Treasury Bills that offer risk-free returns of eight per cent in three months, 10 per cent in six months and about 11 per cent in one year, rather than lend to a private sector they perceive to be high risk at the existing rate of 14 per cent.

This has led to credit rationing and distortions to the disadvantage of small and medium-sized enterprises, low income borrowers and first-time borrowers.

READ: Credit to private sector to slow down


The Central Bank of Kenya (CBK) has maintained its policy rate at 10 per cent five consecutive times since the law came into force on September 14, 2016, partly to avoid injuring borrowers and distorting the credit market through repricing of the existing loans.

The new law has fixed interest rate at four percentage points above the prevailing central bank rate.

On the other hand, banks have been holding the short end of the stick with their financial performance showing declines in interest income on loans which has reduced profitability and dividends to shareholders.

As a result, employees in the banking sector have faced massive retrenchment as banks looked for options to cut costs in the face of falling revenues. It is estimated that 7,000 workers have so far been laid off.

On the stockmarket, the share prices of 11 listed banks have plummeted, pulling down the overall market capitalisation of the bourse.

Banks account for over 30 per cent of the Nairobi Securities Exchange market capitalisation.

The major investors in banking stocks — insurance and companies and pension funds have been hit.

READ: Low credit appetite, rise in defaulters hit Kenya banks

According to Jared Osoro, a director in charge of research and policy at the Kenya Bankers Association, borrowers have not been spared, as banks resort to selective lending to cushion themselves against bad debts.

Banks have reduced the repayment periods for the loans they offer and focused more on lending to corporates with an established credit history rather than SMEs and personal loans.

“The average maturity of loans has also become shorter, dampening financial institutions’ role in supplying longer-term financing for investment,” according to economists at Standard Chartered Bank Global Research.

Analysts at the rating agency Moody’s said increased vetting standards for borrowers have reduced the volume of loan approvals and priced out high risk individual borrowers.

“Lending rate caps have exacerbated a slowdown in credit growth that began early last year, after banks tightened lending criteria in response to a spike in non-performing loans,” said Christos Theofilou, an associate vice-president and banking analyst at Moody’s.

“The Kenyan banking system is experiencing a patch of low credit growth and mounting asset quality pressure.”

According to Standard Chartered Bank Global Research, slowing credit growth poses an additional risk to the economic outlook of the country.

The Bretton Woods institutions — the International Monetary Fund and the World Bank — and CBK have revised downwards the country’s growth prospects for this year.

In the real estate sector, the demand for houses has been subdued as the number of developed units remain unsold for a longer period.

Private sector credit expanded by only 2.1 per cent in May 2017 compared with 4.7 per cent in September 2016.

Manufacturers particularly motor assemblers face low sales due to limited credit to households and small businesses to buy vehicles.

READ: Kenya’s top banks coping with a tight credit market