The capping of interest rates charged by banks has seen them post flat or reduced earnings for the year ending December 31, 2016.
Parliament capped commercial banks’ lending rates last year at four percent above the Central Bank Rate (CBR), which currently stands at 10 percent and further set a minimum interest rate for deposits in interest-earning accounts.
Before the law introduced by Kiambu Town MP Jude Njomo, banks used to charge between 19 percent and 27 percent on loans.
However, those who backed the new law argued the lenders were exploiting their customers through their high rates to make billions of shillings in profits.
According to the Central Bank of Kenya, the banking sector profits in 2015 stood at Sh134 billion, mainly driven by interest earnings from customers.
However, total commercial banks’ earnings fell significantly in 2016 if results of commercial banks released in the last few days are indicative.
Equity Bank, Kenya Commercial Bank (KCB), Barclays Bank, NIC Bank and Stanbic are among banks that have announced their results out of the 40 in the country.
Equity Bank, the country’s largest lender by market value, announced on Wednesday its profit after taxation reduced by four percent to Sh16.54 billion from Sh17.33 billion realised in 2015.
“The challenges in the banking industry are beyond challenges. They are turbulence,” Chief Executive Officer James Mwangi told an investor briefing.
KCB, the country’s largest bank by assets, on the other hand, posted a flat net profit of Sh19.7 billion in its 2016 results.
NIC Bank also recorded a 3.3 percent decline in earnings, driven by a 35.8 percent growth in total operating expenses which outpaced a 17.5 percent growth in total operating revenue.
Similarly, Barclays Bank and Stanbic Bank recorded 12.6 percent and 9.9 percent reduction in earnings.
For KCB, besides rate capping, regional expansion strategy eroded shareholders value as the bank was affected by the ongoing political instability in South Sudan, coupled with the devaluation of the country’s pound and hyper-inflationary effects, which resulted in the bank subsidiary reporting a net monetary loss.
“Of the banks that have released their financial results of 2016, all have recorded a decline in core earnings per share, with the average decline across the banking sector put at 5.4 percent, owing to the tough operating environment as a result of the interest rate caps and higher loan loss provision,” Cytonn, a Nairobi-based investment firm, noted in an analysis.
But it is not all gloom for the banks as interest capping has led to growth in loan advances and deposits.
KCB, for instance, had its loans and advances grow by 11.5 percent to Sh385 billion from Sh34.66 billion, while customer deposits grew by 5.6 percent to Sh453 billion billion from Sh424 billion leading to an increase in the loan to deposit ratio to 86.1 percent from 81.5 percent in 2015.
On the other hand, NIC Bank grew it loan book by 1.3 percent, Stanbic by 3.4 percent and Barclays Bank by 15.9 percent.
“This will be the year of reckoning for banks if their current lobbying to repeal the law on capping interest rates would not be successful. Banks will be hit harder by the low interest rates as this would be the first time they would fully operate in the controlled environment,” said Henry Wandera, an economics lecturer in Nairobi.
He added that he expected banks to continue cost reduction measures that include adoption of digital strategies for both loan disbursement and deposit mobilisation and retrenchment of staff.
For Equity Bank, Mwangi revealed the lender has resorted to investing in securities, such Treasury bonds and bills,which are less riskier compared to loans.
Investment in securities more than doubled, rising 135.13 per cent year-on-year to Sh100.59 billion. According Mwangi, risk-free infrastructure bonds generate more than 14 per cent in return compared to risky loans.
“All infrastructure bonds are above 14. All infrastructure bonds are above 14. Risk free is higher than the lending rate. The government is borrowing at a higher rate than it wants the private sector to borrow at,” Mwangi said.
He also cited East African Breweries, which is seeking Sh6 billion and is offering investors a 14.17 percent rate of return.
“EABL is willing to borrow higher than the capped interest rate. I don’t know how much I can belabour this point, for everyone to recognise the market mechanism is not operational in Kenya,” he said.
However, there are indications that the interest caps law may be reviewed.
President Uhuru Kenyatta, who reluctantly signed the law with a rider that the government will closely monitor its impact, said in his State of the Nation address on Wednesday noted hat SMEs are complaining that they do not have access to credit in spite of the fact that the cost of credit in Kenya is the most affordable in the region after the interest rates capping.
“It is unfortunate that the unintended consequence of capping of interest rates was a slowdown in lending by our commercial banks. This is an issue that concerns us and is one that I am actively seeking to resolve so that credit can start to flow to the real drivers of our economy,” he told MPs.
The International Monetary Fund had also warned the cap is unsustainable in the long run as it poses a risk to Kenya’s financial stability if allowed to persist in the long term.
“The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances. However, interest rate controls are likely to reduce access to credit, weighing on growth. Therefore, it is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency in banking,” the fund’s deputy managing director Tao Zhang said in a statement in January.
- Xinhua news agency contributed to this story.
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