Kenyan President Approves Law Capping Banks’ Interest Rates

  • Lenders must peg rates at 400bp above benchmark rate
  • Decision may hurt Kenyan banks’ earnings, analysts say

Kenyan President Uhuru Kenyatta signed into law a bill limiting how much interest banks can charge for loans, despite assertions by top government officials that the legislation would damage access to credit in East Africa’s biggest economy.

Lawmakers in the nation, which eliminated interest-rate limits in July 1991, voted for an amendment to the Banking Act that would require lenders to 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.

“I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks,” Kenyatta said in an e-mailed statement. “These frustrations are centered around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns.”

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.

‘Negative’ Decision

The decision is negative for Kenya’s banking industry, Alistair Gould, chief executive officer of African Alliance Ltd.’s Nairobi-based unit, said by phone.

“The new law will cause a decline in net interest margins by at least 200 basis points, causing banks to charge other fees to customers to make up for the lost income,” he said. “We expect reduced earnings growth from banks in the medium-term, which could further dampen sentiment towards the listed banks on the Nairobi Securities Exchange.”

Central bank Governor Patrick Njoroge had opposed the move to cap rates, saying it would harm the $61 billion economy, though he has repeatedly asked lenders to reduce what he termed as “remarkably high” loan costs.

Kenyatta’s decision comes a year before he will seek a second term in elections set to take place next August and signal that electoral politics has taken center stage in the economy, Teneo Intelligence Senior Associate Ahmed Salim said in an e-mailed note.

Promise Fulfilled

“Kenyatta has his eyes firmly fixed on the upcoming polls,” Salim said. “Kenyatta’s signature under the banking bill enables the president to make good on his promise to bring down interest rates.”

Two previous attempts by lawmakers to legislate borrowing costs failed and lenders didn’t “live up to their promises” to cut rates and reduce the spreads between deposit and lending rates, Kenyatta said. Commercial banks say the government’s insatiable appetite for funds from the domestic market was the main reason their lending rates have remained high.

Kenyatta said that despite having one of the most efficient financial markets, the country has one of the highest returns-on-equity in Africa. The government will implement the new law “noting the difficulties it would present,” including credit becoming unavailable to some consumers, he said.

Since the central bank’s July 28 decision to cut the reference rate for Kenyan banks, lenders including HF Group Ltd. and National Bank of Kenya Ltd. have said they would reduce lending costs. Kenyatta’s statement on Wednesday was sent after the market closed.

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