Central Bank Governor Patrick Njoroge. FILE PHOTO | NMG
Summary
- The Central Bank of Kenya (CBK) has frozen a bid by banks to raise the cost of loans following the scrapping of lending rate controls on November 7, 2019, drawing protests from the lenders that are suffering reduced profitability.
- The regulator had asked banks to submit new loan pricing formulas that would be the basis of setting interest rates on new credit in an environment where the government was not controlling loan costs.
- Multiple bank executives told Business Daily that the CBK has not approved their submissions, forcing them to operate as if they are still under lending rate controls to avoid falling in trouble with the regulator.
The Central Bank of Kenya (CBK) has frozen a bid by banks to
raise the cost of loans following the scrapping of lending rate controls
on November 7, 2019, drawing protests from the lenders that are
suffering reduced profitability.
The regulator had
asked banks to submit new loan pricing formulas that would be the basis
of setting interest rates on new credit in an environment where the
government was not controlling loan costs.
Multiple bank executives told Business Daily that
the CBK has not approved their submissions, forcing them to operate as
if they are still under lending rate controls to avoid falling in
trouble with the regulator.
“Getting approval is a
nightmare. CBK has taken a more customer protection approach as opposed
to the industry needs,” a bank CEO told Business Daily, seeking anonymity for fear of CBK reprisals.
To
play it safe, banks are lending at no more than four percentage points
above the Central Bank Rate (CBR) which has been lowered to seven per
cent, underlining the conundrum lenders find themselves in.
The bureaucratic gridlock and a lower CBR is partly the reason
average lending rates dropped to 11.89 per cent in June – a record low
since 1991 when the CBK started making the data public.
The
lending rates averaged 12.38 per cent in November last year when rate
cap was repealed with CBR then at 8.5 per cent. Banks have been eager to
price loans to different clients based on their risk profile but this
flexibility remains a mirage after the CBK stepped in as the de facto
controller of cost of credit.
The government removed
the cap last November after it was blamed for curbing credit growth
during its three years of existence. Banks use a base rate that is
normally the cost of funds, plus a margin and a risk premium, to
determine how much they should charge a particular customer.
The
cap, which set rates at four percentage points above the central bank’s
benchmark lending for all customers, had taken out that equation and
the flexibility that lenders say they need in order to accommodate
customers deemed as risky borrowers.
The inability to
price risk in lending decisions risks shutting out many prospective
borrowers as banks seek to reduce their exposure from already large
defaults brought by the Covid-19 pandemic.
The lenders
have increased their investment in government debt securities where bids
have exceeded Sh100 billion in recent months, underlining increased
risk aversion in an economy reeling from the coronavirus fallout.
The
CBK which last year warned banks against reverting to punitive interest
rates of more than 20 per cent in post-rate cap regime, wants every
lender to justify the margins they put in their formulas.
Another
bank executive explained that the CBK wants each bank to justify its
formula based on factors such as the distribution of loan book to
various sectors such as small and medium sized entities.
“We
have submitted several presentations to the CBK but it is still seeking
more clarity on the model. This has meant that we continue tying the
pricing of any new loan to CBR.
“The
CBK is treating this model the same way it does with existing products
where varying of features such as prices requires the nod of the
regulator.”
The Banking (Increase of rate of banking
and other charges) regulations of 2006 require banks to seek CBK nod any
time they are changing features of any product, such as loans.
“Any
change in the features of the product changes the product as earlier
approved and, therefore, the changed product with less, more or
otherwise varied features must be approved by the CBK prior to roll
out,” CBK had reminded banks in a 2016 circular.
Besides the pandemic, the tough regulatory stance taken by the CBK is the other major damper on bank earnings.
The
regulator also unilaterally extended the waiver of fees on
bank-to-mobile transactions to the end of this year, trimming their
non-interest income that would ordinarily pick the slack from lower
income from lending.
The waivers, meant to offer
financial relief to customers and encourage cashless transactions in the
wake of the highly infectious coronavirus, were initially to last for
106 days until June 30.
Banks are now taking an even
more cautious approach in extending new loans at a time they are unable
to re-price a substantial part of their existing loans that borrowers
have sought to repay over longer periods.
Firms and
individuals had between March and June restructured Sh844.4 billion or
29 per cent of the loan book as firms’ revenues fell, triggering salary
cuts and job losses.
CBK’s tough stand on loans
re-pricing started just after the rate caps were repealed on November 7
last year. Assistant director of bank supervision at CBK Matu Mugo
issued a memo to bank CEOs on November 26, directing them to retain
interest rates on all rate cap regime loans, with room to only vary them
downwards.
The memo further directed banks to start
submitting monthly reports on interest rates they are charging on loans
issued during and after the rate cap regime.
“Please
note that failure to comply with this circular will attract appropriate
remedial action as provided for under the Banking Act,” wrote Mr Mugo.
CBK
data showed that credit to the private sector expanded by 7.61 per cent
in the year to June to hit Sh2.69 trillion. This is the slowest pace
since January when it grew at 7.3 per cent.
Most
lenders have raised their provisioning for loan defaults by as high as
three times in appreciation of the persisting economic hardships due to
job losses, pay cuts and falling revenues.
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