Kenya: Lending rate cap hits shares again, sparks growth fears
Kenya, East Africa’s biggest economy, stopped controlling commercial rates in the early 1990s. The industry has since grown to offer the highest return-on-equity for lenders on the continent, drawing in foreign investors.
If you fix the exchange rate in Nigeria, you will get a shortage of FX; and if you fix loan rates in Kenya, you will get less lending
Many people in Africa complain commercial lending rates are too high, holding back personal and corporate investment. But some predicted that Kenyatta’s decision to cap commercial rates will make banks less willing to lend, on the grounds that their interest income won’t offset their risks.
IMF resident representative Armando Morales said the cap would make it harder for credit growth to recover from a drop caused by the collapse of three banks over the last year. “This measure is not going to make it any easier to recover credit growth,” he told Reuters.
Commercial lending rates averaged 18.2 percent in June, the central bank said, mirroring levels in countries such as Uganda and Ghana, where policymakers have also urged banks to provide cheaper credit.
Analysts at London-based frontier markets specialist Exotix accused Kenyatta of playing politics 12 months before an election scheduled for next August. Shares in Kenyan banks, some of which lost as much as 10 percent on Thursday, fell by a similar margin on Friday.
“If you fix the exchange rate in Nigeria, you will get a shortage of FX; and if you fix loan rates in Kenya, you will get less lending,” said Razia Khan, head of research for Africa at Standard Chartered in London. “Kenya, even with its uptake of tech, is not going to suddenly be the economy that somehow bucks the trend.”
The new law sets a ceiling on commercial lending at 4 percentage points above the central bank’s policy rate – now 10.5 percent – and a minimum deposit rate of 70 percent of the benchmark rate.
Banks including Barclays Kenya said they would await more information from the central bank. Co-op Bank Kenya said it was offering new loans at 14.5 percent, in line with the law.
Jimnah Mbaru, the chairman of Nairobi-based Dyer and Blair Investment Bank, said commercial banks had failed to respond to prolonged unofficial pressure from the central bank.
“If it has not worked then of course you have no options but to intervene,” he said. Businesses often complain that the high cost of credit hurts investment while few individuals are able to afford home loans.
“You keep on repaying but it is not reducing for the first few years,” said Nairobi advocate Ibrahim Onyatta, waiting to be served at a Barclays Kenya branch.
Shares in KCB Group,, operator of Kenya’s biggest bank by assets, fell 10 percent at the start of trade, extending its losses from the previous day. Equity Bank, which serves millions of micro-borrowers, fell by a similar margin.