Central Bank Asks Parliament for Time to Compel Banks to Lower Interest Rates

By Soko Directory Team / February 22, 2016




During the week, the market was on an upward trend with NASI, NSE 20 and NSE 25 gaining by 0.1%, 1.2% and 0.5% respectively. This was on the back of gains in EABL, Safaricom and BAT that rose 0.4%, 0.3% and 0.3%, respectively. Safaricom and KCB were the top movers accounting for 42.4% of the trades during the week. On a YTD basis, the three indices are down 3.4%, 5.1%, and 2.8%, respectively, and from the February 2015 peak to date, NASI and NSE 20 are down 20.7% and 30.3%, respectively.

Equities turnover fell by 32% during the week to Kshs 1.9 bn from Kshs 2.8 bn the previous week. Foreign investors were net sellers for the second straight week with their participation rising to 69.6% from 66.8% last week.

The market is currently trading at a price to earnings (PE) ratio of 12.4x versus a historical average of 13.8x, and with a dividend yield of 4.2% versus a historical average of 3.3%. The charts below indicate the historical PE and dividend yields of the market.

cytonn report feb 21

The Central Bank of Kenya (CBK) has asked Parliament to give it time to compel banks to lower their interest rates instead of imposing caps on lending rates through the Central Bank of Kenya (Amendment) Bill 2015. Parliament had proposed to cap interest rates at 5% above the Central Bank Rate (CBR), which is currently at 11.5%. The CBK argued that the law, if passed, will encourage an informal system where banks will abandon risky loans thereby denying SMEs crucial funds to spur economic growth. In a bid to increase market transparency, the CBK recently published the lending rates of each commercial bank: Central Bank publication of average lending rates with the averages as shown;

 bank rates cytonn report feb 21

The average lending rate as at Dec 2015 stood at 18.2%, which is 6.7% above the CBR. Should parliament adopt the proposal all interest rates will be capped at 16.5%, greatly reducing the net interest margins earned by commercial banks, assuming that deposit rates shall remain unchanged. Standard Chartered Bank had the highest increase in the lending rate over the 6 months but its rate still remains lower than that of I&M Bank and Equity Bank. Barclays is the only listed lender to have reduced its lending rate during the six months, mainly because of the average decline in business loans by 3.8% as the bank increasingly shifts from corporate business to target the growing SME sector.

Our view is that the increased transparency and reporting initiative by CBK is positive for the financial sector; as it will make information more available to the consumer and transparency improves market efficiency and pricing. However, we concur with CBK’s view that legislating rates will be bad for the economy. There are borrowers whose riskiness can only warrant loaning them at high rates, say 20%. The high rate compensates for their riskiness. Making it illegal not to give such a loan would reduce the amount of borrowing in the market, deny access to loans to the risky borrowers, which in turn can lead to a lot of businesses and individuals not getting access to funding to grow their businesses.

Barclays Bank of Kenya plans to start agency banking in March, which will make it the first international lender to embrace the model. This signals plans by the bank, which is largely viewed as a corporate lender to move into the retail market that is currently dominated by Equity Bank. Banks have taken up the model to boost efficiency resulting from savings associated with fixed costs of opening and maintaining a new branch. As at September last year, 17 commercial banks had contracted 39,871 agents who conducted over 193.4 mn transactions that were valued at Kshs 1 tn. With the increase in transactions processed by agents expected to continue, we view this as a positive move for the bank as it seeks to tap into the retail market. The agency-banking model, pioneered by Equity Bank, has changed the banking sector landscape and banks like Barclays have no option but to follow to get deposit growth.

Kenya Airways has signed up an American advisory firm PJT Partners to restructure its balance sheet and help it seek approximately Kshs 60 bn in long-term capital in the next six to nine months. The airline’s long and short term loans grew to Kshs 105 bn and Kshs 52 bn, respectively for the six months to September as it posted a net loss of Kshs 10.95 bn in the period. The airline has already taken a Kshs 4.2 bn bailout loan from the Treasury and another Kshs 20 bn from Afrexim Bank in order to keep its operations afloat. In our view, restructuring, financing and other turnaround strategies will help the company improve its cash flow position. However, the financial position of the company may make it difficult to raise the required funds.


See full Cytonn Weekly Report here.

 



About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

View other posts by Soko Directory Team


More Articles From This Author








Other Related Articles










SOKO DIRECTORY & FINANCIAL GUIDE

ARCHIVES

2019
  • January 2019 (256)
  • February 2019 (216)
  • March 2019 (287)
  • April 2019 (254)
  • May 2019 (220)
  • 2018
  • January 2018 (291)
  • February 2018 (219)
  • March 2018 (278)
  • April 2018 (225)
  • May 2018 (238)
  • June 2018 (178)
  • July 2018 (257)
  • August 2018 (249)
  • September 2018 (256)
  • October 2018 (287)
  • November 2018 (285)
  • December 2018 (187)
  • 2017
  • January 2017 (183)
  • February 2017 (195)
  • March 2017 (207)
  • April 2017 (104)
  • May 2017 (169)
  • June 2017 (206)
  • July 2017 (190)
  • August 2017 (195)
  • September 2017 (186)
  • October 2017 (235)
  • November 2017 (253)
  • December 2017 (266)
  • 2016
  • January 2016 (166)
  • February 2016 (165)
  • March 2016 (190)
  • April 2016 (143)
  • May 2016 (246)
  • June 2016 (183)
  • July 2016 (271)
  • August 2016 (249)
  • September 2016 (234)
  • October 2016 (191)
  • November 2016 (243)
  • December 2016 (153)
  • 2015
  • January 2015 (1)
  • February 2015 (4)
  • March 2015 (166)
  • April 2015 (109)
  • May 2015 (117)
  • June 2015 (121)
  • July 2015 (150)
  • August 2015 (157)
  • September 2015 (189)
  • October 2015 (170)
  • November 2015 (174)
  • December 2015 (208)
  • 2014
  • March 2014 (2)
  • 2013
  • March 2013 (10)
  • June 2013 (1)
  • 2012
  • March 2012 (7)
  • April 2012 (15)
  • May 2012 (1)
  • July 2012 (1)
  • August 2012 (4)
  • October 2012 (2)
  • November 2012 (2)
  • December 2012 (1)
  • 2011
    2010
    2009
    2008
    2007
    2006
    2005
    2004
    2003
    2002
    2001
    2000
    1999
    1998
    1997
    1996
    1995
    1994
    1993
    1992
    1991
    1990
    1989
    1988
    1987
    1986
    1985
    1984
    1983
    1982
    1981
    1980
    1979
    1978
    1977
    1976
    1975
    1974
    1973
    1972
    1971
    1970
    1969
    1968
    1967
    1966
    1965
    1964
    1963
    1962
    1961
    1960
    1959
    1958
    1957
    1956
    1955
    1954
    1953
    1952
    1951
    1950