…the move could however see banks become more reluctant to lend
A big change for Kenya’s top-tier banks is set to come down the pipe if President Uhuru assents to the proposed Banking (Amendment) Bill in less than two weeks.
Fitch Ratings report has said that leading banks like KCB Group, Co-corporative and Equity banks among other top tier lenders are better placed than their smaller competitors to manage the fall in profitability and rise in loan impairments likely to arise from the proposed new rate caps.
The Banking Bill was passed by Kenya’s parliament on 27 July and proposes to regulate both loan and deposit rates and include a loan rate cap of 4 per cent above the central bank’s benchmark rate (CBR), currently at 10.5 per cent, and a floor on deposit rates of 70 per cent of the CBR.
The bill is still subject to presidential sign off and its immediate impact will is expected to see a sharp reduction in net interest margins for all banks.
But large players, with stronger franchises and more diverse business models, should be able to attract new business and, with greater volumes, offset some of the squeeze on profitability, according to the report released yesterday.
“We think loan rate caps will also make it difficult for banks to price risk correctly, leading to further weakening of asset quality. Banks might also become more reluctant to lend, adding further pressure on economic growth,” read the report.
Fitch ratings further said the situation could condense Kenyan banks and become risk averse and placing excess liquidity into government bonds, a similar scenario witnessed in South Africa recently after it had introduced a rate cap on unsecured consumer lending, resulting to a retrenchment from this segment by some banks.
“If rates are capped, profitability could be squeezed as a result, although banks could try to offset this by increasing fees and cutting costs,” the report said.
If some types of lending prove to be unprofitable, the report says that the business models might have to be overhauled, particularly at the smaller banks. Kenya’s ‘B+’ sovereign rating is on Negative Outlook. Kenyan banks have priced loans off the Kenyan Banks’ Reference Rate (KBRR) since 2014, which currently stands at 8.9 per cent with the average lending rate standing at 18.2 per cent.
If the rate cap is introduced and assuming no change in the CBR, this would mean that no loan could be priced above 14.5 per cent.
Rate caps could also force loan prices to converge, forcing lenders to compete more aggressively on products and service. This is more likely to benefit larger banks.
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