Kenya banking sector return on equity to halve-Ecobank

Large banks are able to source for cash cheaply but still charge the same prices as small lenders allowing them to enjoy huge interest spreads. PHOTO | FILE  

In Summary

• After applying the Banking Amendments law, the rate spread will drop from the highest to Nigeria region of 6 per cent, the lowest in the continent while Ghana will have the most lucrative rates.

By OTIATO GUGUYU, dotiato@ke.nationmedia.com

Bank shareholders will see their returns per share almost halve in the next financial year as lenders adjust to the new interest rate regime, says Ecobank Kenya research team.

Ecobank head of Fiancials Desk Mr George Bodo says return on equity, the profitability generated by each share, will reduce from current average of 18 per cent to 10 per cent.

“We do not expect to see much impact of the rate caps in quarter four but we will start seeing effects in quarter 2 next year and full year results before banks do adjustments,” Mr Bodo said yesterday.

READ: New regulations to hit banks' single largest source of income

Ecobank which has a continental presence in 36 countries says Kenya had the highest rate spreads in Africa at around 11 to 12 per cent ahead of Ghana.

After applying the Banking Amendments law, the rate spread will drop from the highest to Nigeria region of 6 per cent, the lowest in the continent while Ghana will have the most lucrative rates.

Flight to quality loans

Ecobank researchers also see a flight to quality loans by mobile lenders once the rate cap is applied to micro loans.

They say that banks were able to carry huge volumes of bad loans with about 30 per cent delinquencies with the high rates, something they may not be able to do with the rate capped at 14.5 per cent.

Banks are however not waiting to take a hit as they make strategic initiatives and innovation to derive value as effects of the interest rate caps set in.

Ecobank’s research may only hold if banks play fair, however, lenders are already pulling all manner of stops which may erode the intended effects of the new banking legislation of reducing the cost of borrowing.

Consumers of financial services reported that their banks had introduced a barrage of new levies that effectively deny borrowers any meaningful reduction in the cost of loans.

Banks are also looking for loopholes in the opaque law to avoid classifying accounts as interest earning deposit accounts or applying caps on mobile loans.