Rate cap has led to decline of loan applications and disbursements – KBA

Capping of interest rates at 4 percent above the Central Bank Rate (CBR) has not led to the intended objectives says the Kenya Bankers Association (KBA).

Loan applications and disbursement started declining immediately after the Banking (Amendment) Act was signed into law in August 2016.

“Credit to the private sector is nearly grinding to a halt, with the most affected being unsecured personal loans. Year-on-year credit growth is at 1.7 percent, but month-on-month we are in a negative territory,” said  Jared Osoro, KBA’s director for research and policy on Thursday.

“While it had become clear that lines of credit were becoming popular amongst Kenyan banks, we are not seeing much enthusiasm in that space,” he added.

According to the survey tracking the effect of the Banking Act, Loan applications dropped from 2.2 million in August 2016 to 1.9 million in September 2016, a 17 percent drop.

Over the same period, the number of loans that were disbursed fell from about 1.1 million to below 750, 000, a 32 percent decline, as the market came to terms with the effects of the new law.

From the surveyed banks there has been a 1,933 jobs reduction as the number of management and non-management staff reduced from 28,009 employees as at August 2016 to 26,076 employees by June 2017.  

Over the period, banks appear to be relying more on agents with the number of agencies rising from 41, 686 as at August 2016 to 53, 667 outlets as at June 2017.

“It is increasingly becoming evident that the expectations of the Act are not being met. The inability for credit to adjust towards meeting the growth slack on the back of weak demand and the link between credit to private sector growth – which is nearly at a grinding halt – means that the greater economy is being hurt said Habil Olaka, KBA’s Chief Executive Officer.

“It is now a high time for all stakeholders including the Treasury, Central Bank, and the legislative arm, to re-engage and address the delivery of lower interest rates for the average Kenyan from a win-win standpoint,” added Olaka.

On 14 September 2016, the law capping the interest rates that commercial banks charge at four percentage points above the Central Bank Rate (CBR) came into force. Under the same law, banks have to pay depositors at least 70 per cent of the CBR.