Saccos are more accommodative in their debt collection than banks.
Claims by Kenyan commercial banks that their businesses have suffered from the capping of interest rates have been contradicted by a report showing the savings and credit societies increasingly becoming the new lenders of choice for borrowers.
The Financial Sector Stability Report covering the first year since the capping, shows that credit growth slowed down because large borrowers had weak balance sheets that could not accommodate additional debt, a scenario that would have persisted even if the interest rates caps were not present.
“Lower household demand for credit and weak corporate sector balance sheets as well as cashflow problems facing many firms impacted credit uptake,” says the report which was released a week ago.
It adds that profitability and liquidity problems were reported by scores of companies even outside the finance sector as evident in the record number of profit warnings posted by firms listed on the Nairobi Securities Exchange; job losses across sectors; and increased litigation related to failure to meet contractual obligations.
Banks have blamed interest rate caps for their inability to lend more and make more money and have won the support of the Central Bank of Kenya and the International Monetary Fund in calling for the interest rate ceilings introduced in September last year to be lifted.
The report points out that this uncertainty surrounding the interest rate-capping law may undermine the uptake of credit.
The Central Bank is one of the contributors to the report, which collates the perspectives of regulators who oversee banking, insurance, pensions and savings and credit societies.
The Kenyan government had banked on lower interest rates becoming a catalyst to revitalise the economy. This did not happen, indicating lack of investment opportunities, which could be due to low spending ability with workers facing job uncertainty or outright dismissal as companies retrench staff.
Another factor hampering credit uptake, according to the report, is the government’s continued borrowing, giving banks less incentive to offer products to the private sector at the prevailing interest rates.
The report says the putting of three banks in receivership in 2015 and 2016 sent shivers through the market, causing liquidity problems, especially for small tier banks that usually financed start-ups, business expansion and trade, even before the interest rate-caps came into play.
Credit to the private sector grew by 2 per cent in October, from 4.6 per cent in October 2016 and 19.5 in 2015. The number of reports requested from credit reference bureaus (a mandatory part of the loan appraisal process in all banks) also dropped last year, signalling a further drop in credit demand by individuals. Banks requested 4.9 million reports last year compared to 5.9 million requests in 2015.
CBK data shows that the drop in report requests started in February last year, hitting a low in August before bouncing back in September when the interest rate ceiling Bill was passed.
“The Kenya Bankers Association survey covering 77 per cent of the banking industry reveals that the law has exacerbated the decline in bank credit to the private sector. Credit to the private sector is almost grinding to a halt, with the most affected being unsecured personal loans,” said KBA when releasing the results of the survey.
According to the survey, loan applications and disbursement started declining immediately after the law was signed in August 2016.
Loan applications dropped from 2.2 million in August 2016 to 1.9 million in September 2016, a 17 per cent drop. Over the same period, the number of loans that were disbursed fell from about 1.1 million to below 750,000, a 32 per cent decline.
HTM Capital, a research firm that has been tracking Kenyan household debt levels for the last six years, found that personal loan accounts declined eight per cent last year to 7.19 million.
Low demand for bank loans by individuals at a time when price has been lowered further points to lack of bankable projects and a harsh economic environment.
Analysis of bank financial results indicate non-performing loans and liquidity as key challenges facing banks.
Some small lenders are battling challenges that forced some of them to stop lending while others are now selling their good loans to the big players so as to raise cash for operations.
Liquidity woes contributed to the collapse of two banks in 2015, which saw some of their customers seeking safety in larger banks.
Non-performing loans rose to a decade high of Ksh245 billion ($2.4 billion) as at end of July.
The piling up of bad debts has forced banks to adopt a more conservative lending approach, opting to clean their loan books before growing credit.
Unpaid loans, mostly associated with corporate clients, have also put banks’ credit appraisal processes in the spotlight.
A check by The EastAfrican found that bank loan officers mostly consider the financials of loan applicants without due regard to the sector dynamics, which could for instance be complicated by a new entrant eating into the potential borrower’s market share.
Voices calling for the repeal of the interest caps have been growing.
In a parliament dominated by the ruling Jubilee Party, it is expected that the president’s perspective on the matter will prevail.
The law had been introduced to tame banks’ insatiable appetite for profit, which saw them charge exorbitant lending rates.
Queries have remained over how banks will respond to a repeal of the law and whether they will revert to their old way of doing business.
“We want to increase market discipline instead of slipping back. Banks have to improve their lending practices ...and it has to be risk-based lending for example by looking at the credit history of the borrower,” said CBK Governor Dr Patrick Njoroge when giving his projections of a post-repeal period.
He noted the period preceding the interest rate caps was marked by indiscipline by the bankers who were more profit-driven than being customer-centric.
Banks were competing on grounds of profits posted, a perception spurred by a media that tended to rate their performance on their bottom-line rather than their core business of financial intermediation.
Today, more and more banks are pledging to lend cheaply to borrowers who have a good credit history while being punitive to defaulters.
This has seen Kenyans turn to Saccos, with the proportion of debt from commercial banks shrinking to a record low last year. This is according to HTM Capital, which has been tracking Kenyans’ borrowing habits for the past 10 years.
Saccos have friendlier credit terms compared with banks even though the amount to be borrowed is limited to an individual’s savings.
Also, Saccos are more accommodative in their debt collection than banks making them a good option during harsh economic times.
“Commercial banks’ share of aggregate private sector credit declined to a record low of 86 per cent while the Saccos’ share hit an all-time high of 11.2 per cent,” said HTM Capital in their report released recently.
The shrinkage by banks followed an 8.2 per cent drop in their loan accounts while those operated by Saccos shot up by 17.5 per cent.
The growth of Saccos also follows their aggressive recruitment without regard to whether new members have a common factor with the founders such as teachers Saccos.
Loan accounts operated by microfinanciers also dropped 14.5 per cent, despite the entry of international micro-lenders into the market.
Micro-lenders have been accused of being exorbitant in their pricing and equally uncouth in their collection.
The introduction of interest rate caps was expected to cause an exodus from Saccos to the banking sector but the reverse has happened. This would indicate that the banking industry is ailing from more than just the capping of interest rates.