Analysts at Moodys Investors Service believe that the President’s move to reject the Finance Bill 2019 unless parliament scraps the interest rate caps augurs well for Kenya’s credit sector.
The credit rating agency suggests that the repeals would gradually lead to a higher private sector credit growth and overall economic growth. At the same time, higher lending rates would boost banks’ profits to levels similar to pre-cap periods.
Revising the interest rate cap will no longer limit banks lending, providing a credit positive environment in the country.
The agency predicts that revising the interest rate caps would provoke higher lending rates for SMEs over the next 12-18 months while stabilizing banks’ non-performing loans and eventually decline the NPL ratio.
While Moody’s is hopeful that the move will improve interest income in banks, it is hard to expect results similar to those in 2016, before the rate caps. However, interest rate cap repeals will sure reverse the trend of lending in banks.
Moody’s anticipates that this will improve banks’ preference towards the SMEs lending over the government and corporate borrowers.
Between 2016 and 2019, banks shifted credit from the private to the government sector. For instance, private sector credit grew by less than 5% in 2017 and 2018 and 6% in June 2019. This compares to a 19% investment in government securities in 2018 alone.