Rate cap has impacted on Kenyan banks lending and deposit rates – Fitch

Fitch Ratings says  Kenya’s cap on loan rates and its floor on deposit rates have had a dramatic impact on the spread between banks’ lending and deposit rates, which have halved on average since implementation just over a year ago.

This comes a few days the Kenya Bankers Association (KBA) said the rate cap needs to be amended because it has cut credit growth to firms and curbed the ability of small and medium-sized businesses

According to Fitch, the loan cap is also causing banks to reduce their lending to the private sector as they can no longer price fully for higher risks.

“All banks saw a sharp reduction in loan spreads after the government capped rates at 4 percentage points above the central bank’s benchmark rate (CBR – currently 10 percent) for all loans, and placed a floor of 70 percent of the CBR on deposit rates, leading to falling interest income from loans and rising funding costs,” it said.

The intended benefit to customers of lower interest rates on loans is offset by a slowdown in lending, as banks shy away from lending to higher-risk sectors such as SMEs and from granting long-term loans.

Private sector credit growth fell to 1.2 percent year-on-year (yoy) by July 2017, from 7.5 percent in July 2016.

“We expect new lending to remain subdued as long as the rate cap remains in place. Credit growth had already been slowing significantly since 2015 due to weaker operating conditions, rising non-performing loans (NPLs) and three banks going into receivership,” it adds.

The reduction in lending has contributed to a rise in credit losses, as some customers are no longer able to get refinancing.
The sector’s NPL ratio continued to rise in 2017, ending 1H17 at 11 percent.

Profitability is down across the sector, even for the larger banks, despite their stronger franchises.

“We expect the lending cap and the deposit floor to be revised (but not rescinded), although a decision is unlikely before the re-run of the country’s election later this month,” notes Fitch.

 Source Fitch