Opinion and Analysis
By NIGEL SMITH
In Summary
President Uhuru Kenyatta’s recent signing into law of
the Banking Amendment Bill 2015 that caps interest rates on loans and
sets the minimum deposit rates has been widely reported.
Yet it appears that even the business community is divided as to whether this is a good or bad law.
There can be no argument that high interest rates have continuously hindered growth of Kenyan businesses.
If you compare the rates offered to corporate
borrowers in the UK and Europe, for instance, where interest rates are
often below five per cent to the average Kenyan rates that stand in
excess of 20 per cent, you can see that Kenyan businesses are largely
disadvantaged.
The interest rates reduction should of course lower borrowing costs for business and hence bring down operating costs.
In particular, the SME market can now access bank facilities at lower rates, which could enable this sector to expand.
This would be a substantial boost to the economy as
businesses that previously did not borrow from banks can now look
forward to doing so, and those that did, are likely to seek higher
levels of support from their lenders.
Perhaps more important is the “feel good factor”.
Kenyan businesses have, over the years, become accustomed to high
interest rates and are primed to gain a large psychological relief
besides the expected positive impact on businesses as more enterprises
seek higher levels of bank finance at the lower rates.
If additional loans, including to the SMEs, are
sanctioned by the banks, this would undoubtedly be a welcome kick-start
to the economy and the country’s ability to deliver the Vision 2030 at a
time when Kenya’s and global economy are facing uncertainties.
But will the lower rates lead to an increase in the
supply of credit? The real risk is that the capping of borrowing rates
will reduce bank liquidity, leading to a decrease in the number of new
loans, especially to “riskier” clients.
There is a real possibility that the reduced
liquidity within the banking sector will lead to banks opting for a
“flight to quality”.
In other words, banks may all chase the same
borrowing opportunities, which could drive the rates of interest down
for the larger stable companies, but those that do not fall within this
category could see the banks’ appetite to lend, actually decrease.
There may be a cap on the rate that can be charged,
but if banks decide not to lend, then the economy and the SME market in
particular, will not receive the kick-start and may instead contract.
For those borrowers who currently have facilities
with interest rates above the 14.5 per cent cap, I would strongly urge
them to take advantage of the new rates, but also, well before maturity,
seek refinancing opportunities. Just because you have a facility now
does not mean your bank will lend to you at the reduced rate tomorrow.
Market forces
Having to pay a minimum rate of 7.35 per cent to
savers as well as capping rates to borrowers at 14.5 per cent, is likely
to affect the liquidity of banking sector that has already seen the
collapse of a number of banks.
Many banks are confronted with having to slash rates for existing customers, who are potentially “higher risk”.
If the returns on these clients falls by say five per cent, the risk-reward ratio will be out of sync.
It is worth noting that economic experts have been
reluctant to see this statute passed, probably due to the potential
negative consequences on businesses and consumers.
This is largely driven by past experience in EAC bloc and particularly Kenya where caps were abolished in 1991.
This is largely driven by past experience in EAC bloc and particularly Kenya where caps were abolished in 1991.
The best way to achieve lower rates is by allowing market forces to dictate through competition within the banking sector.
The Kenyan banking market is highly competitive with 42 banks.
But the levels of liquidity within these
institutions will be detrimentally affected, leading to consolidation
within the banking sector as the banks are unable to achieve capital
adequacy ratios and comply with the new saving and borrowing limits.
Time will tell
Consolidation may be a good thing since the
remaining banks would be more liquid and thus would be able to offer
competitive rates to both borrowers and depositors alike.
For those who hold stocks in the banking sector, this has already impacted negatively on their price.
For those who hold stocks in the banking sector, this has already impacted negatively on their price.
Within 24 hours of the law being announced, we saw
the value of shares across the banking sector fall by Sh47 billion.
Going forward, things may settle down, especially if consolidation is an
output of the new legislation.
Consolidation means mergers and acquisitions and
shareholders in the remaining banks are likely to be the winners
although those holding shares in banks where the “for sale” sign is
erected, may have a bumpy ride.
The cheaper loans and higher deposit rates will
indeed be good for many, but whether it is good for the overall economy,
only time will tell.
Smith is head of debt advisory East Africa,
with KPMG Advisory Services Limited (nigelsmith2@kpmg.co.ke). The views
and opinions are those of the author and do not necessarily represent
the views and opinions of KPMG.
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