ANXIETY AS BILL CAPPING LOAN RATES IN KENYA LIKELY TO PASS

Central Bank Governor Patrick Njoroge is said to have told bankers to speed up procedures that will see interest rates drop by at least 3 per cent to avoid a potential clash with the legal lid.

TUESDAY AUGUST 9 2016 - Tension is rife in the banking industry as signs indicate that a bill seeking to cap interest rates is likely to pass into law.

At least five major banks reportedly engaged in a stress test, an exercise meant to audit their capacity to survive should the bill become law.

A source confided to Smart Company that bank chiefs held a crisis meeting with Central Bank Governor Patrick Njoroge and widely discussed the matter, signalling the possibility that borrowing costs could be capped.

The CBK governor is said to have told the bankers to speed up procedures that would lower interest rates by at least 3 per cent to avoid a potential clash with the legal lid.

“He told us our business was at risk if we do not take any steps that will lower interest rates by 300 basis points as soon as possible. This is a signal that the bill has chances of going through, but let us wait and see what will happen because either way a compromise has to be found because it cuts both sides, you know,” the source said.

The bankers are said to have taken issue with the fact that the bill is silent on whether the cap on rates would affect those lending in foreign currency. Banks could switch to foreign currency lending, dollarising the economy.

THIRD ATTEMPT

It was not also clear whether the bankers committed to the 3 per cent drop in lending rates but even if they did, the rate would still fall to about 18-21 per cent, which is way above the 14.5 per cent that the bill proposes, given the CBR is currently at 10.5 per cent. The proposed law says loan costs should not go beyond 4 per cent of the regulator’s indicative rate.

This is the third attempt to control interest rates, with bank sources intimating that the timing is crucial and hence the panic.

“The other attempts failed because their timing was not as critical as this one. We are in a sensitive political cycle and you never know what will happen.

"I think if such a bill came after elections, then it would be outrightly rejected, but now the masses are behind it and you can imagine what that means,” said a bank source, who sought anonymity as the matter is still too sensitive to be openly discussed.

Several Savings, Credit and Corporative Societies (saccos) are said to be holding their breath over the bill, expecting to attract borrowers who will not be able to obtain loans from banks.

The Kenya Bankers Association said the proposed legislation will force banks to reconsider lending to the largely risky customers with no collateral. Banks will naturally prefer corporate clients, whom they deems as safer.

SHYLOCKS

While this would hurt small businesses and salaried employees, the banks would also suffer most by losing billions in forgone interest from these loans, which are a source of their huge profits.

The discrimination against small borrowers would be a blessing to saccos as they would not be covered by the interest rate cap. Shylocks will also benefit, a move that would work against the objective of limiting the loan rates as shylocks lend at exorbitant costs.

KBA chief executive Habil Olaka had earlier told Smart Company that there was a need for a harmless way of reducing the rates.

“We all agree the current rates are high but the question is how do we have them lowered and I can assure you that the approach that controls the rate is not the best,” Mr Olaka said.

The banks will, however, regret squandering the chance to use the current improved Credit Information Sharing platform to reduce the rates, which have saddled borrowers with expensive loans.

The loans segment is one of the biggest sources of income for banks, which made a combined profit of Sh145 billion last year even after their listed counterparts in other sectors faced financial headwinds that saw most of them giving profit warnings as others declared losses.

President Uhuru Kenyatta will have the last say on the bill, with possibility of suggesting amendments.

Daily Nation