How Law Capping Interest Rates has affected Profits of Most Banks in Kenya

On August 2016, President Uhuru Kenyatta signed the Banking (Amendment) Bill into Law and, in the process, capping the interest rates at 4 percent below the Central Bank of Kenya rate.

Before the signing of that bill into Law, the Central Bank of Kenya (CBK) was against it and offered its advice on the matter but the advice was overlooked in what was seen by economic analysts as the President choosing to appeal to the masses at the expense of the economy.

The real estate and investments company Cytonn Investments, in one of their weekly reports just before the signing of the bill, likened the interest rates bill debate to that of Brexit where Britons overwhelmingly voted to withdraw from the European Union. Cytonn said, “Our view is that interest rate caps would have clear negative effect on the Kenyan economy and ultimately to the Kenyan people. Consequently, the President should certainly demonstrate leadership by declining to sign the bill into law because it would not be good for the Kenyan public.” That was then. No advice was taken into account. The bill was assented on and eventually became law.

Just months after the signing of the interest capping bill into law, the impact has started coming out as it is being witnessed by the 2016 full year financial results for some banks that have released their results. Some of the banks that have released their financial results, have witnessed a drop in their profits as compared to what they witnessed in 2015 with all pointers pointing towards the Interest Capping Law.

On March 15th 2017, Equity Bank Kenya recorded a 4 percent drop in profits after tax for the year ended 31st December 2015. The lender recorded 16.6 billion shillings in profits, a drop from 17.3 billion shillings in 2015. The lender said that the interest rates capping contributed immensely to the drop-in profits.

On February 2017, Barclays Bank of Kenya released their full year financial results for the year ending 31st December 2016. The bank realized a drop-in profit by 10 percent to 10.8 billion shillings. The interest rates capping law too played a role in these results.

it happens that the interest capping law has not affected banks only. On Thursday, this week, the Nairobi Securities Exchange (NSE)  released their financial results and recorded a drop-in profit by 40 percent and one of the reasons was a drop-in equity turnover and the prevailing interest rates capping law.

Co-operative Bank of Kenya, however, seemed to have beat all the odds to witness a rise of 8.5 percent in profits after tax for the financial results for year ending 31st December 2016.

Some more lenders will be releasing their full year financial results and we are likely to see a similar trend in reduced profits and this should not take us by surprise. Family Bank of Kenya is set to release their full year financial results come next week. The lender has been through some turmoil, coupled with the prevailing interest capping rates. It has managed to sail through but what will be the effects of all these?