Its equally true that the spread is ridiculously wide, economically unsustainable and unacceptable but using legislation as the remedy is not the solution, it looks good from far but far from good. It’s well- known that once the door of liberalization is opened, trying to close them most likely creates more inefficiency effect than the problem you would be attempting to solve.
Kenya banking sector is a timing time bomb, any careless tampering with policies and/or legislation can trigger financial crisis of unimaginable level.
Today we have 7 banks Tier 1 that control 58.21% collectively.12 Tier 2 controlling controlling 32.42% of the market Top 19 banks control 90.63% of the market share .21 other banks Tier 3 control 9.24% of the market share.
Tier 1 mostly depend on normal customer deposits up to 80% while some T2 and all T3 are funded more than 80% by through term deposits from government agencies and institution investors, these term deposits attract a rate over 15%,if the president sighs this bill in to law some T2 & T3 will have to pay deposits rates much higher and could have a devastating economic effect on the larger economy.
Capping interest rates would lead to informal lending channels that undermine the effectiveness of monetary policy transmission, capping will be ineffective if credit is not available or other terms of borrowing are unduly punitive. If the bill is signed into law, it may lead to emergence of credit rationing, unavailability of credit to a wide segment of the population.
During the recent Treasury bond issue, investors will earn 14 per cent for the five-year bond and 14.8 per cent for the 20-year paper. Individuals and SME’s will be locked out from accessing credit as banks will prefer to lend to the government (risk-free) and not businesses.
Most of the unsecured loans would disappear,a category that is highly risky, leading to obscene processing fees. The margin only covers risk free loans.
Out of top 10 listed stocks at NSE 6 are banks, if the bill is signed to law you can expect foreign investors to vote with their feet. The effect of such capital flight will have far-reaching repercussion on the exchange rate and send the Kenya shillings in shock waves.
The bill says that deposits will be at 70% of base rate which means that the banks have to cover the cost of funds. If they don’t lend, how will they cover this huge cost? It is sensible to acknowledge that legislation is not the best way to lower interest rates. It would be wise that the members of parliament engage key stakeholders in order to avoid any economic turmoil if the bill is signed into law.
Note; The author’s article does not necessarily represent Kenyan Wall Street’s views.
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