SMEs and Households Lose Out as Bank Credit Allocation Favors Large Businesses

More than 1.2 million SMEs have lost out on accessing loans from banks following the implementation of interest capping law which restricted banks to price loans at four percent above the Central Bank Rate (CBR).

A report by the Kenya Bankers Association (KBA) on the Impact of the Interest Capping Law has stated that while the law was well-intentioned, it has failed to achieve its key objective of increasing credit uptake by households and micro and small enterprises.

The report noted that contrary to its spirit, the law has significantly stifled access to capital with the number of loan accounts reducing by 1,229,242 accounts between 2016 and 2017.

At the same time, the average loan size has increased by 47 percent, indicating established and larger companies are finding it easier to access capital at the expense of microenterprises, which form the foundation of the country’s sustainable economic development.

“This is a clear indication that the law has not succeeded in increasing access to loans to the lower cadre of the economy, but rather created conditions that favor the upper end of the economy,” said KBA Chief Executive Officer Dr. Habil Olaka.

The report is among a series of KBA surveys that have shown a consistent trend of adverse effects occasioned by the Banking (Amendment) Act that was introduced by Parliament in the third quarter of 2016. From KBA’s findings, the credit markets witnessed five shocks between 2012 and 2017 and in each event the markets recovered within three months of the event — with the exception being the rate caps.

“If this price control was good for the economy, the credit market would have seen an uptick by January 2017. The fact that credit growth has continued to decline up to 14 months later means the caps are stalling the recovery and thus pulling down our economy,” said Olaka.

“It is evident that the anticipated recovery of private sector credit growth following the enactment of the law has not been realized as envisaged. The notion that lower cost of credit would lead to the reversal of the declining rate of growth has been disapproved beyond all doubt,” he added.

According to KBA, the operating environment has left banks with little recourse due to heightened sensitivity to risk and rising non-performing loans (NPLs) levels. The credit market has therefore settled on short-term and secured loans. The law has also occasioned a crowding-out effect, with Government securities becoming more attractive investment avenues than private sector enterprises.

While banks had in the past taken up efficiency initiatives enabled by technology, the controlled environment has accelerated the digitization trend and made staff and branch rationalization more compelling. More than 20 bank branches were closed and more than 1,400 bank staff were laid off during 2017.