By Gabriel Onyango
The Banking Amendment Act, capping interest rates was hailed as a savior by the general public when it was signed into law amid protest from the banking community. A year later, its effects have had far reaching consequences on all stakeholders.
Reasons for capping
The capping of interest rates was ideally meant to protect the consumer from exorbitant charges by commercial banks who had developed a tendency to hide some of their charges making customers enter into loan agreements without really understanding the nitty gritty details. According to a survey done by the Financial Sector Deepening (FSD) many bank branches were displaying outdated pricing structures and tariff guides that even staff on the front office were unfamiliar with.
Banks were left to their own devices to regulate their own rates but that wasn’t happening and the people getting loans suffered.
After signing the Banking Amendment Bill President Uhuru Kenyatta talked of Kenyan banks having one of the continent’s highest return on equity investment adding, “Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.”
At the time there was a common feeling among stakeholders including Central Bank of Kenya Governor Dr. Patrick Njoroge that the interest rates in banks were high and needed to come down, however not all agreed that interest capping was the way to go.
When the bill came into law there was widespread relief as customers thought that for once hope of getting cheaper loans had turned to reality.
Impact on banks
According to a 2017 study submitted to the USIU Chandaria School of Business by Sylvia Nyakia, the capping of interest rates has had an adverse effect on banks’ shares.The study cites that when the cap was effected, share prices of banks dropped. Reason being, investors were worried about reduced profitability and found them less attractive thus traded in less bank shares. A comparison of the prices between the last quarter of 2015 and 2016 revealed that most shares lost sh10 from their 2015 price with some shedding up to a half of their previous price.
Banks also recorded a decline in annual profits in 2016, an observation which the study predicts would continue hurting their stock in future. Hence the need to diversify into bonds, treasury bills and real estate to better fortunes.
In response, banks have reduced their lending to high risk customers, the bulk of which are Small and Medium Sized Enterprises (SME). For instance, banks can now only charge a maximum interest rate of 14 per cent, the government floated a treasury bond this year offering a 10 percent interest with close to zero risk. So why would any bank opt to lend anyone else other than the government whose risk is almost zero?
Impact on customers
The other side of the coin is Small and Medium Sized Enterprises and individuals who no longer have easy access to loans due banks holding back.
This means SMEs are investing less and considering the fact that they are the biggest employers in the Kenyan economy, its impact trickles down to individual households.
People now have fewer options in regards to finance sources, they thus turn to uncouth loan sharks who charge exorbitantly making the interest capping law a point of pain instead of the savior it was meant to be.