In a report, Large Kenyan Banks: 2019 Peer Review Fitch Ratings says that implementation of the lending rate cap has led banks to shy away from lending to SMEs leading to subdued earnings.
CBK is expected to retain the 9% base lending rate (BLR) where banks should not go above 4.00bp above the BLR.
Slowed lending to SMEs
The slowdown in lending to the private sector especially SMEs is due to limited ability to price correctly for risk due to the rate cap. In retaliation, the banks have focused on government securities that offer attractive yields besides having lower risk and carrying a capital gain.
Despite the lending cap intention to make credit more accessible and affordable, the opposite has happened where it has dampened loan growth. In 2018, gross loans grew by a paltry 5% compared with 6%, 7%, and 17% in 2017, 2016, and 2015 respectively. Furthermore, the spread between loan and deposit rates more than halving.
Asset quality weakness
On top of that, the loan cap leads to asset-quality weakness where losses start to rise when certain industries are starved out of credit. Low loan growth has amplified the non-performing loans (NPL) ratio for the eight largest banks to 8.9% at end-2018 compared to 6.6% at end-2017. The average NPL for the large banks is expected to reach 10% by end-2019 due to persistent asset-quality pressures.
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