- Lenders heading into uncharted territory, CBA’s Atiti says
- Rate limits set to lead to consolidation, NKC’s Nel says
Shares of Kenyan banks plunged after President Uhuru Kenyatta signed a law that caps the interest rates lenders can charge on loans and set minimum payments on deposits.
KCB Group Ltd., the nation’s largest bank by assets, slumped the most in more than 7-1/2 years to its lowest level since December 2012 after Kenyatta signed the law saying he sympathized with Kenyans frustrated by the cost of credit and poor savings rates. Cooperative Bank Ltd. plummeted the most on record, while Equity Group Holdings Ltd., the market leader in terms of value, capped the biggest one-day decline in seven years.
“Bank margins are going to thin out,” said Faith Atiti, an economist at Commercial Bank of Africa Ltd. in Nairobi. “This is uncharted territory for most banks, especially those struggling with high non-performing loans and with a huge retail exposure.”
Kenyatta announced after the stock market had closed on Wednesday that he’d assented to amendments to the Banking Act, requiring that lenders peg credit costs at 400 basis points above the benchmark central bank rate. The law also compels financial institutions to pay interest of a minimum of 70 percent of the so-called CBR on deposits.
Kenyan lenders extended loans at a weighted average rate of 18 percent in June, according to the most recent statistics from the central bank, compared with 15.7 percent a year earlier. In comparison, the central bank has cut the CBR by 1 percentage point to 10.5 percent this year. It also also lowered the Kenya Bankers’ Reference Rate, or KBRR, by 97 basis points.
Top executives at the country’s lenders were surprised by Kenyatta’s decision, Kenya Bankers Association Chief Executive Officer Habil Olaka told reporters in Nairobi.
“We were not expecting that,” he said. “We were expecting the president would refer it back to parliament” before signing it.
Lenders aren’t clear whether the KBBR or the CBR will be used to determine what rate banks can charge, nor do they know whether the cap will affect existing loans or money borrowed by clients in foreign currency, Olaka said. They are consulting the central bank for clarification, he said.
KCB Group fell 8.4 percent to 30 shillings at the close of trading in Nairobi. Diamond Trust Bank Kenya Ltd. was the worst performer on the Nairobi Securities Exchange All Share Index, sliding 10.7 percent, the most since May 2004. Equity tumbled 9 percent to 32.75 shillings. Standard Chartered Bank Ltd. declined 1.5 percent to 204 shillings, as investors focused on the lender’s relative aversion to retail loans, according to Nairobi-based Bonsai Capital Director Ben Nyamweya.
“Kenyan banks loan rates are too high,” said Jacques Nel, a senior economist at Paarl, South Africa based NKC African Economics. “It might not be the best way to do it, but the government was running out of options. The rate cap presents opportunities for consolidation, for smaller banks it’s definitely going to be bad. If they can’t charge higher rates anymore, it’s going to be tough for them to survive.”