- Lenders can survive reduced profit margins from lower rates
- Nation to borrow offshore to force interest rates down
Kenyan banks have been “expropriating too much profit” from the interest rates they charge on loans and have room to lower borrowing costs, Treasury Secretary Henry Rotich said.
Lawmakers in East Africa’s biggest economy approved a bill last month that will limit the amount of interest banks can charge on loans to four percentage points above the central bank’s benchmark rate. The proposal is awaiting President Uhuru Kenyatta’s signature before it becomes law.
“Banks must make decent profits like any other businesses, that’s why we are saying there is scope to lower interest rates,” Rotich told reporters in the capital, Nairobi. “The profits are too much yet you can still live with less profits.”
Kenyan lenders’ annual profit fell 6 percent to 95.3 billion shillings ($940.3 million) in 2015, according to the central bank, as expenses grew faster than income. The industry is expected to register an improved performance in 2016, the regulator said.
Banks committed last week to lower charges and set out measures to boost lending, including allocating 30 billion shillings to small- and medium-sized enterprises and women at concessionary rates, according to Lamin Manjang, chairman of the Kenya Bankers Association.
The government will continue to explore ways to bring down rates, Rotich said, including borrowing less from the domestic market and financing its needs from more foreign loans. Authorities in the $61 billion economy plan to borrow 225.3 billion shillings internally to plug a 691 billion shillings budget deficit in the year through June 2017.
While capping interest rates may have “unintended consequences” for the economy, such as limiting access to credit, Kenyatta will consider both sides of the debate before making a decision, Rotich said.
“We don’t want to be seen as looking at one point of view,” he said.
Lenders extended loans at a weighted average of 18 percent in June, according to the most recent statistics from the central bank, which has lowered its benchmark rate by 100 basis points to 10.5 percent this year.
Banks plan to lower lending rates by about 100 basis points by the end of August in line with the central bank’s 97 basis point reduction of its Kenya Banks’ Reference Rate to 8.9 percent in July.
While opposed to capping costs, central bank Governor Patrick Njoroge has said lenders are charging “remarkably high” rates and that it was time they made a “credible down payment” to borrowers.
Large Kenyan banks are better placed than their small counterparts to manage the expected fall in profitability and rise in loan impairments that could result if the limits are imposed, Fitch Ratings Ltd. said in a note on Wednesday.