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| President Uhuru Kenyatta signs a Bill into law at State House in Nairobi recently. |
Having survived two attempts to control the cost of borrowing, the lenders have this time been caught flat-footed by the President’s move.
Lenders are now planning to cut down on fixed deposits accounts, drop risky products such as unsecured loans and invest in government securities, which are viewed as safer bets as indicated by circulars to their staff.
Banks believe implementing the interest cap regime will be unworkable and will only lead to a host of adverse economic effects that they have direly warned about. They say the law would drive high-risk borrowers into informal financial services and damage small business, and compel some borrowers to resort to foreign currency-denominated loans, which could see the weakening of the shilling.
The Kenya Bankers Association (KBA) chief executive Habil Olaka said implementing the law would pose a challenge given the processes involved in adjusting interest rates.
“The reality is that the CBR may change from time to time but now that there is a law and banks don’t make laws, we will have to try and implement it despite the difficulties,” Mr Olaka said last week.
“We had highlighted all these difficulties but the message we got is that we need to experiment and if it doesn’t work we will reverse. Meanwhile, we have to suffer the consequences of that experiment.”
READ: Tanzania keeps close eye on Kenya interest rates cap impact
Banks are already feeling the heat of the new law. The lenders’ shares fell sharply on Thursday, the day after President Kenyatta signed the Bill. The stock of 11 listed lenders took a Sh47 billion hit.
If indeed the law may need to be reversed, the banks would have to wait for six months before that could be done unless the National Assembly Speaker Justin Muturi waives the period if it satisfies the House as a an exceptional situation.
While some of the reasons given by banks in opposing the law sound credible, Kenyans are a happy lot given that the huge burden of loans they have been shouldering has been considerably eased. There are also available avenues that the State can use to avoid the pitfalls that the lenders have warned about.
Here are some of the options:
SME credit bureaus
Analysts have argued that the move will make banks abandon the Small and Medium Enterprises (SME) which are considered risky to lenders as banks seek to avoid large volumes of risky credit because that would lead to an increase in non-performing loans, eating deeper into their already thin margins.
Economist Robert Shaw says the low-risk borrowers are likely to benefit while banks may keep off high-risk customers such as the small and medium businesses who badly need the money most to grow their ventures.
“The risk of President Kenyatta’s move is that banks will be much more careful about who they lend to because it does not mean because the rates are lower, more people will access credit,” he said.
This, however, provides an opportunity for the government and the private sector to improve risk assessment for SMEs by creating a rating agency that can look at small business cash flow, strategy and give it a score just like the Credit Reference Bureaus (CRBs) do for individual lenders.
Metropol CRB Chief Executive Officer Sam Omukoko says the firm already has a pilot project under the SMEP programme that has rated 2,800 small companies out of which 1,600 have obtained loans based on their score.
“Equity Bank, Transnational are already accepting our rating scores and we are almost concluding talks with Kenya Commercial Bank, which is running a pilot,” Mr Omukoko said.
Metropol looks at the type of business being undertaken by an SME, its cash flow, assets, and calculates its profit and loss then combines this with credit information history to come up with a score.
The African Development Bank (AfDB) President Akinwumi Adesina says SME risk is more of perceived than real adding that the government could help the sector understand small businesses better.
“I think the risk that the private sector talks about in agriculture and SMEs in my view is perceived risk not necessarily real risk. So they need to understand private sector better, they need to have their front and back office structure to be able to price loans appropriately given the risk that are involved. This has been successful in Nigeria, Uganda, Tanzania and here we are implementing it with Equity Bank,” Mr Adesina told Smart Company.
State-owned banks and saccos
If banks make good their threat to keep off the small businesses, the State has a trump card; it can use lenders it has controlling stake in, such as the National Bank and Consolidated Bank to position themselves as SME lenders of choice filling the vacuum that banks have predicted will go to informal lenders and loan sharks.
Kenya can also transform the inefficient direct financing it has been channelling through the Youth, Women Enterprise Fund (WEF) and Uwezo by streamlining them in line with parastatal reforms and create a body that focuses on lending to small firms, thus mitigating the risk of lack of funding for such ventures.
Mr Adesina proposed that SME should cast their net wide and go for a mix of private equity funds for long-term investments besides the short-term financing offered by commercial banks.
Fewer banks
Deserting the low-end segment of the market may create an opportunity for consolidation and differentiation of banks, something Treasury has been trying to push for in the last two budgets by increasing minimum capital.
Mr Deepak Dave of Riverside Capital said by reducing interest spread income for the banks, the law may well force family-owned small banks to realise that small loans and retail are not for them, thus reducing competition among lenders and finally allowing consolidation of the SME/retail market.
The new law will easily reduce the number of risky banks as some lenders lose businesses that lack collateral to savings and credit cooperatives, well capitalised competition or informal lenders.
Regulating shylocks
And while admittedly this may drive some smaller businesses to loan sharks, informal lenders such as Tala, Branch, Saida and Mombo Mobile, which issue short-term loans via mobile money and mobile lending by banks — M-Shwari, M-Coop Cash, KCB-M-Pesa and Equitel— this presents a great opportunity for Treasury to regulate the financial online platforms given its impressive growth.
Cabinet secretary Henry Rotich has stated that the Treasury wants to come up with regulations for these platforms, and this new regime offers perfect rationale for doing so.
The Institute of Economic Affairs (IEA) CEO Kwame Owino, however, says that banks are not necessarily in competition with the informal economy as instant loan rarely serves as a source for investments.
“I think banks have not been in competition with these lenders, you can’t pay rates of up to 10 per cent per month and run a business, most of the people I know who take such loans are based on emergencies and not necessarily to invest and I do not think this would change,” Mr Owino said.
M-Akiba and diaspora bond
Banks may also turn to government securities, which is considered less risky and a realm where they are able to collude and rig the rates to stay high.
“I know there is an argument that if all banks concentrated bids on the bills and bonds, the rates there will go down, but I do not think so. Unless the bidding is transparent the banks will continue to collude and keep rates high there as well,” Mr Owino said.
President Kenyatta has a perfect checkmate for liberalising the government paper making it competitive so that banks do not use bills and bonds as a safe haven. The President can use M-Akiba and diaspora bond to minimise the influence of banks on the rates of the Treasury papers.
“If Treasury comes up with a transparent and effective way of trading bids and bonds, then the market will respond, currently there is a lot of collusion and the big banks who know how much the government wants influence the prices,” Mr Owino said.
Treasury has been sitting on plans to take advantage of mobile money and foreign remittances even as international bodies urge African governments to find alternatives to expensive credit.
Daily Nation
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