Claims by Kenyan commercial banks that their businesses have
suffered from the capping of interest rates have been contradicted by a
report showing the savings and credit societies increasingly becoming
the new lenders of choice for borrowers.
The Financial
Sector Stability Report covering the first year since the capping, shows
that credit growth slowed down because large borrowers had weak balance
sheets that could not accommodate additional debt, a scenario that
would have persisted even if the interest rates caps were not present.
“Lower
household demand for credit and weak corporate sector balance sheets as
well as cashflow problems facing many firms impacted credit uptake,”
says the report which was released a week ago.
It adds
that profitability and liquidity problems were reported by scores of
companies even outside the finance sector as evident in the record
number of profit warnings posted by firms listed on the Nairobi
Securities Exchange; job losses across sectors; and increased litigation
related to failure to meet contractual obligations.
Staff retrenchment
Banks
have blamed interest rate caps for their inability to lend more and
make more money and have won the support of the Central Bank of Kenya
and the International Monetary Fund in calling for the interest rate
ceilings introduced in September last year to be lifted.
The report points out that this uncertainty surrounding the interest rate-capping law may undermine the uptake of credit.
The
Central Bank is one of the contributors to the report, which collates
the perspectives of regulators who oversee banking, insurance, pensions
and savings and credit societies.
The Kenyan government
had banked on lower interest rates becoming a catalyst to revitalise
the economy. This did not happen, indicating lack of investment
opportunities, which could be due to low spending ability with workers
facing job uncertainty or outright dismissal as companies retrench
staff.
Continued borrowing
Another
factor hampering credit uptake, according to the report, is the
government’s continued borrowing, giving banks less incentive to offer
products to the private sector at the prevailing interest rates.
The
report says the putting of three banks in receivership in 2015 and 2016
sent shivers through the market, causing liquidity problems, especially
for small tier banks that usually financed start-ups, business
expansion and trade, even before the interest rate-caps came into play.
Credit
to the private sector grew by 2 per cent in October, from 4.6 per cent
in October 2016 and 19.5 in 2015. The number of reports requested from
credit reference bureaus (a mandatory part of the loan appraisal process
in all banks) also dropped last year, signalling a further drop in
credit demand by individuals. Banks requested 4.9 million reports last
year compared to 5.9 million requests in 2015.
CBK data
shows that the drop in report requests started in February last year,
hitting a low in August before bouncing back in September when the
interest rate ceiling Bill was passed.
“The Kenya
Bankers Association survey covering 77 per cent of the banking industry
reveals that the law has exacerbated the decline in bank credit to the
private sector. Credit to the private sector is almost grinding to a
halt, with the most affected being unsecured personal loans,” said KBA
when releasing the results of the survey.
According to
the survey, loan applications and disbursement started declining
immediately after the law was signed in August 2016.
Loan
applications dropped from 2.2 million in August 2016 to 1.9 million in
September 2016, a 17 per cent drop. Over the same period, the number of
loans that were disbursed fell from about 1.1 million to below 750,000, a
32 per cent decline.
Selling loans
HTM
Capital, a research firm that has been tracking Kenyan household debt
levels for the last six years, found that personal loan accounts
declined eight per cent last year to 7.19 million.
Low
demand for bank loans by individuals at a time when price has been
lowered further points to lack of bankable projects and a harsh economic
environment.
Analysis of bank financial results indicate non-performing loans and liquidity as key challenges facing banks.
Some
small lenders are battling challenges that forced some of them to stop
lending while others are now selling their good loans to the big players
so as to raise cash for operations.
Liquidity woes
contributed to the collapse of two banks in 2015, which saw some of
their customers seeking safety in larger banks.
Non-performing loans rose to a decade high of Ksh245 billion ($2.4 billion) as at end of July.
The
piling up of bad debts has forced banks to adopt a more conservative
lending approach, opting to clean their loan books before growing
credit.
Unpaid loans, mostly associated with corporate clients, have also put banks’ credit appraisal processes in the spotlight.
A check by The EastAfrican
found that bank loan officers mostly consider the financials of loan
applicants without due regard to the sector dynamics, which could for
instance be complicated by a new entrant eating into the potential
borrower’s market share.
Voices calling for the repeal of the interest caps have been growing.
Post-repeal period
In
a parliament dominated by the ruling Jubilee Party, it is expected that
the president’s perspective on the matter will prevail.
The law had been introduced to tame banks’ insatiable appetite for profit, which saw them charge exorbitant lending rates.
Queries
have remained over how banks will respond to a repeal of the law and
whether they will revert to their old way of doing business.
“We
want to increase market discipline instead of slipping back. Banks have
to improve their lending practices ...and it has to be risk-based
lending for example by looking at the credit history of the borrower,”
said CBK Governor Dr Patrick Njoroge when giving his projections of a
post-repeal period.
He noted the period preceding the
interest rate caps was marked by indiscipline by the bankers who were
more profit-driven than being customer-centric.
Banks
were competing on grounds of profits posted, a perception spurred by a
media that tended to rate their performance on their bottom-line rather
than their core business of financial intermediation.
Today,
more and more banks are pledging to lend cheaply to borrowers who have a
good credit history while being punitive to defaulters.
This
has seen Kenyans turn to Saccos, with the proportion of debt from
commercial banks shrinking to a record low last year. This is according
to HTM Capital, which has been tracking Kenyans’ borrowing habits for
the past 10 years.
Aggressive recruitment
Saccos have friendlier credit terms compared with banks even though the amount to be borrowed is limited to an individual’s savings.
Saccos have friendlier credit terms compared with banks even though the amount to be borrowed is limited to an individual’s savings.
Also, Saccos are more accommodative in their debt collection than banks making them a good option during harsh economic times.
“Commercial
banks’ share of aggregate private sector credit declined to a record
low of 86 per cent while the Saccos’ share hit an all-time high of 11.2
per cent,” said HTM Capital in their report released recently.
The
shrinkage by banks followed an 8.2 per cent drop in their loan accounts
while those operated by Saccos shot up by 17.5 per cent.
The
growth of Saccos also follows their aggressive recruitment without
regard to whether new members have a common factor with the founders
such as teachers Saccos.
Loan accounts operated by
microfinanciers also dropped 14.5 per cent, despite the entry of
international micro-lenders into the market.
Micro-lenders have been accused of being exorbitant in their pricing and equally uncouth in their collection.
The
introduction of interest rate caps was expected to cause an exodus from
Saccos to the banking sector but the reverse has happened. This would
indicate that the banking industry is ailing from more than just the
capping of interest rates.
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