CFC Stanbic is the first bank to slash their rates on existing and new loans. This comes after President Uhuru Kenyatta signed into law the Bill to cap interest rates levied by banks on loans. According to the bill the rates should not be more than 4% of the rates set by the Central bank. Now CFC has set their rates at 10.5% for both old and new loans. Other banks that have reduced their rates are the KCB and Co-operative banks. However, the two have only reduced for new loans as they await guidelines from the government on how to treat old loans. The reduction of loan rates is good news to citizens as most have ended up paying much more for loans than they expected.
Why Kenyan bankers opposed the bill to cap lending rates
Kenya bankers association (KBA) was opposed to the bill as they claimed it would lock out those who struggle to access capital. They also claimed that it would go against the financial inclusion policy. KBA incoming Vice Chairman said that the bill would affect the country’s economy. This as he said was because small d medium enterprises (SMEs) who depend on financial support from banks would be greatly affected.
This was the third attempt to make amendments to the Banking act. The first attempt was made in 2001 and also in 2013
Speculated impact of capped bank interest rates
Governments cap interest rates for various reasons that could either be political or for economic reasons. Kenyan members of parliament based their reason on excessive profits made by the financial institutions. The capping is expected to protect vulnerable borrowers from predatory lenders.
With reduced rates it creates larger pool of willing borrowers. Lenders are faced with a challenge:
- If they should increase lending which may bring in more bad clients who will have non-performing loans.
- Whether to invest more on processing systems in order to properly identify good clients. This, however, raises operating costs.
- Invest more on reaching out to good clients which will also increase the institution’s overheads.
All the options increase cost for the financial institutions which may affect the institutions. However, the institutions could absorb the changes and still maintain a profit.
An immediate impact observed after signing of the bill into law was a stampede on the Nairobi Securities Exchange as people rushed to sell their shares. Other banks paused issuance of unsecured loans, loans on motor vehicles as well as emergency cash loans.
EAC monetary union
East African countries are closely watching the outcome of the capping as Kenya is the first country in the region to introduce the law. It is feared that the new law on interest rate capping could affect the EAC monetary union. Experts claim that higher risk borrowers will be blocked while banks could be forced to mergers and letting go of staff in order to fit in markets where rates are not capped.
President Uhuru on signing the bill acknowledged there would be challenges. However, he said that the government will monitor the challenges while working on measures to reduce the cost on credit.