Credit Rating agency Fitch Ratings has said that Kenya’s leading banks are better placed than their smaller competitors to manage the fall in profitability and rise in loan impairments likely to arise from proposed new rate caps. This is because rate caps could force loan prices to converge, forcing lenders to compete more aggressively on products and service which is more likely to benefit larger banks.
The proposals in the Banking Amendment bill passed by Kenya’s parliament on 27 July seek to regulate lending rates at 4% above the central bank’s benchmark rate (CBR),currently 10.5%, and a floor on deposit rates of 70% of the CBR.
The bill has been handed over to the president of which he is expected to make a decision on whether to sign it off or reject within fourteen days.
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“The immediate impact will be a sharp reduction in net interest margins for all banks. But large players, with stronger franchises and more diverse business models, should be able to attract new business and, with greater volumes, offset some of the squeeze on profitability. We think loan rate caps will also make it difficult for banks to price risk correctly, leading to further weakening of asset quality.” Says to Fitch Ratings in its latest research note on Kenya.
The agency also backs Central Bank’s views that Banks might also become more reluctant to lend which will in turn add further pressure on Kenya’s economic growth.
Fitch continues to say that if rates are capped, Kenyan banks are more likely to become risk averse and place excess liquidity into government bonds rather than lending to customers, same scenario that happened in South Africa where they recently introduced a rate cap on unsecured consumer lending and this has led to a retrenchment from this segment by some banks.
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“Profitability could be squeezed as a result, although banks could try to offset this by increasing fees and cutting costs. If some types of lending prove to be unprofitable, business models might have to be overhauled, particularly at the smaller banks.” says Fitch Ratings.
However, the agency also agrees that Interest rates in Kenya are very high and have been a key contributor to the rise of non-performing loans (NPL) in recently quarters.
