New Bill on loan charges risks eroding 22pc bank earnings

Money Markets

The Central Bank of Kenya. A newly proposed Bill seeks to strictly contain loan fees and commissions charged by banks. PHOTO | FILE 

By CHARLES MWANIKI

In Summary

• The new Bill by Kikuyu MP Kimani Ichung’wa is at the drafting stage, meaning it is yet to be presented to Parliament for debate.
• SIB says that in its interpretation, the Bill proposes the already set 400 basis points rate-cap as the maximum Annual Percentage Rate (APR) — in addition to nominal interest rate. APR includes all other costs or fees involved in procuring a loan.
• These deposits would also have to be placed in banks where the government or its agencies hold at least 20 per cent equity.

A newly proposed Bill seeking to contain loan fees and commissions charged by banks within the 14 per cent interest rate cap has the potential to wipe off up to 22 per cent of the lenders income, an investment bank has warned.

Standard Investment Bank (SIB) head of research Francis Mwangi says in a note that the proposed Banking (Amendment) Bill 2017 is a regulatory risk that is also likely to hit listed banks’ valuations, which are already under strain from the amendment made last year that caps interest rates.

The new Bill by Kikuyu MP Kimani Ichung’wa is at the drafting stage, meaning it is yet to be presented to Parliament for debate.

SIB says that in its interpretation, the Bill proposes the already set 400 basis points rate-cap as the maximum Annual Percentage Rate (APR) — in addition to nominal interest rate. APR includes all other costs or fees involved in procuring a loan.

“Between 2011 and 2015, the banking industry generated 21.9 per cent of its profit from fees and commission income on loans and advances.

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'Loan processing fees'

For listed banks, as at the end of September 2016, 14.6 per cent of total profit was earned from loan processing fees,” said Mr Mwangi.

“If passed in its current form, the Bill will require banks to either waive loan processing fees, effectively resulting in lower non-interest income to total income ratios or to retain the loan processing fee but adjust downwards the amount of income booked as interest income on loans, effectively eroding net interest margins. Irrespective of the route taken, the impact will be the same – reduced profitability.”

In addition to including fees and commissions within the interest rate, the proposed law also seeks to restrict the way government agencies deposit money with commercial banks, including setting of duration of deposits and tying minimum interest payable to prevailing Treasury bill and bond rates.

These deposits would also have to be placed in banks where the government or its agencies hold at least 20 per cent equity.

But the tightening of charges on loans carries a bigger threat, since it hits directly at a key revenue source for lenders.

This is because SIB analysis shows that government and other public institutions’ deposits totalled Sh254 billion as at June 2016, representing just 9.4 per cent of banking industry deposits.

Single Treasury account

KCB and NBK, which would readily meet the criteria proposed in the Bill given their significant government shareholding, already hold over 60 per cent of these deposits.

“The Bill’s proposal of controlling State agencies’ deposits is a milder form of a 2015 government proposal to roll out a Single Treasury Account – an account in central bank where all Public funds would be held so as to improve Government cash management,” said Mr Mwangi.

The regulation of banks has tightened in the past one year, with CBK pushing lenders to improve the quality of their financial disclosures and Parliament pushing through the controversial capping of interest rates.

cmwaniki@ke.nationmedia.com