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Kenyan central bank slams rate-cap law as lenders see further margin pressure

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Kenyan central bank slams rate-cap law as lenders see further margin pressure

The Central Bank of Kenya has criticized a law capping the interest that commercial banks can charge on loans, amid indications that the government may soon modify the controversial legislation — or remove it altogether.

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The law, which was signed by Kenyan President Uhuru Kenyatta in August 2016 and took effect the following month, limits how much Kenyan lenders can charge on loans at no more than 4 percentage points above the central bank's base rate and requires them to pay out interests on deposits of at least 70% of the base rate.

It is designed to limit the cost of borrowing to individuals and businesses.

But the central bank said this week that the rate cap undermines its independence from the government and has created "an environment of possible perverse outcomes" that constrains its ability to signal its policy stance.

The Kenyan central bank cut its base rate by 50 basis points to 10.0% less than a week after the law came into force, requiring disgruntled commercial lenders in Kenya to set their loan interest rates at a maximum of 14.0% and triggering concerns about their net interest income and bottom lines. It unexpectedly further lowered the base rate in the week of March 19 to 9.50%, potentially leading to further pressure on lenders.

The ratio of nonperforming loans to gross loans in the Kenyan banking sector has steadily increased since the rate caps were implemented, according to data gathered by S&P Global Market Intelligence. Meanwhile, the net interest margins of the country's five biggest banks by market capitalization have also ticked down since the third quarter of 2016 and remained at the lower point well through the following year.

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The central bank is not alone in opposing the rate caps. The Kenya Bankers Association said there is "little evidence" that rate caps help citizens, while National Treasury Secretary Henry Rotich recently called the caps "unsustainable" and pledged to reform or remove them.

The International Monetary Fund is also critical of the rate caps and has made their revision or removal a condition for the extension of a standby credit facility available to the country.

The fund last week extended the facility for six months after Kenyan authorities committed to "substantially" modifying interest rate controls, signaling that Rotich's pledge may be coming to fruition.

Nairobi-based KCB Group Plc, meanwhile, sees room for compromise. CFO Lawrence Kimathi recently told Bloomberg News that the current rate caps will "destroy the financial services sector" if they go on for one or two more years, but said raising the limit from the current 4 percentage points above the base rate would be an easier route than pushing for a full repeal of the law.

KCB Group is 17.52%-owned by the Kenyan government, according to S&P Global Market Intelligence data.

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Click here to see both macroeconomic and banking information for Kenya.
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