Salaried workers and owners of small businesses are headed for tough times after Equity Bank
announced it is cutting down unsecured and micro loans to comply with a new set of global accounting rules on loan loss covers.
Equity
group chief executive James Mwangi said the lender was moving away from
unsecured and small business loans — which are deemed risky — ahead of
the coming into force of the new guidelines, technically referred to as
International Financial Reporting Standard (IFRS) 9.
The new guidelines are meant to come into force on January 1, 2018.
The
new accounting standards require banks to make higher loan loss
provisions to withstand any possible shocks, which Equity reckons is
unprofitable under the current interest rate capping regime that has
narrowed lending margins.
“We are moving away from
unsecured lending. IFRS 9 requires you to use historical ratio to make
provisions at point of booking the loan. This is not sustainable with a
margin of seven per cent,” Mr Mwangi told an investor briefing on
Tuesday.
Equity, which is Kenya’s biggest bank by
customer numbers with a client base of 11.7 million, announced a 7.4
drop in net profit.
Growth of credit to the private
sector fell further to 2.1 per cent over the 12 months to May 2017,
according to CBK data, blamed on the rate caps and pre-election jitters.
“Commercial banks’ lending to micro, small and medium
enterprises (MSMEs) fell by an estimated 5.7 per cent between August
2016 and April 2017,” Cental Bank of Kenya governor Patrick Njoroge said
in May.
Equity has traditionally focused on
micro-enterprises and low-income earners to grow volumes and overtake
giants such as Barclays
and StanChart
, who previously dominated Kenya’s banking scene.
Mr
Mwangi attributed the change in strategy to the 25.6 per cent decrease
in the size of Equity’s micro-enterprises loan book to Sh11.6 billion in
the half-year period to June 2017 compared to Sh15.6 billion in a
similar period last year.
The ratio of toxic loans under the micro-segment remained the highest at 13.2 per cent from 11 per cent in June 2016.
“There is a decline in micro loan book. With the loss ratio, it means we are not pricing risk,” Mr Mwangi said.
Equity’s consumer lending loan book contracted 5.34 per cent in the six-month period to Sh56.7 billion.
The volume of bad loans in this category jumped to seven per cent from 5.9 per cent in the period under review.
The two segments account for a quarter or 25.77 per cent of Equity’s loan book, which stood at Sh265 billion as at June 2017.
Equity’s
change in strategy defies the segments that helped transform the former
building society into one of Kenya’s biggest lenders.
Analysts
at Standard Investment Bank said that Equity’s change in lending
strategy will slow down loan book growth and may hurt returns.
“We
do not expect any ramp-up in lending in second half. At start of the
year, management had forecast full-year group loan book growth of five
per cent, a significant drop from realised five-year average loan growth
of 24.4 per cent,” SIB said in a research note.
Effective
September 14, 2016 loan interest rates were capped at 400 basis points
above the signal rate – currently at 10 per cent - and deposit rates at a
floor of 70 per cent of the Central Bank’s rate. – This results in an
interest margin of seven per cent.
IFRS 9 rules demand that banks project possible toxic loans for the next 12 months and make provisions.
This is a departure from the current system where impairments are made in a phased approach after a loan becomes non-performing.
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