Kenya’s Biggest Bank Faults State Borrowing for High Ratesby and
KCB CEO says government borrowing needs to be more predictable
Plunge in share price after rate-cap law an ‘over-reaction’
Kenya’s biggest bank said the government can do more to help reduce high lending rates by being clearer about its borrowing plans, after President Uhuru Kenyatta signed into law a bill capping the cost of loans.
Poor planning by state departments means the state often rushes to the market to raise financing when its coffers are already empty, pushing up yields on Treasury bills, one of the key determinants of interest rates, KCB Group Ltd. Chief Executive Officer Joshua Oigara said. Kenyatta on Wednesday approved legislation capping rates and setting minimum payments on deposits, saying he sympathized with Kenyans frustrated by the cost of credit and poor savings rates.
“The government needs to do more in terms of being predictable on their coming to market,” Oigara, 40, said in an interview on Thursday at his office in the capital, Nairobi.
The law signed by Kenyatta, a quarter of a century after the country eliminated interest-rate limits, requires 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. Treasury Secretary Henry Rotich said last week that lenders make “too much” from interest charges.
Banks extended loans at a weighted average of 18 percent in June, according to the most recent statistics from the central bank. That compares with a benchmark Central Bank Rate of 10.5 percent and a Kenya Banks’ Reference Rate, used as a base lending rate by the industry, of 8.9 percent.
Yields on 182-day T-bills rose 16 basis points to 11.18 percent at an auction on Wednesday after surging to a record 22.3 percent in October as the government sought to plug gaps in its budget.
“The government is being too big a big borrower and they have really been driving interest rates,” Aly Khan Satchu, the chief executive officer of Rich Management, a Nairobi-based adviser to companies and wealthy individuals, said in a phone interview. “In October last year, what set the interest rates was that the government came in and borrowed 1-year money at more than 20 percent and repriced the entire curve and we are dealing with the aftermath of that.”
Kenyan banks hold 55 percent of the government’s 1.8 trillion-shilling ($17.8 million) of debt, according to central bank data.
Kenyatta, who will seek a second term in elections next year, said in a statement that despite having one of the most efficient financial markets, the country has one of the highest returns-on-equity in Africa. KCB had a return on equity of 25 percent in 2015, while Equity Group Holdings Ltd., the nation’s largest bank by market value, had an ROE of 25.46 percent, compared with average ratios of 19.4 for South African lenders, according to data compiled by Bloomberg.
“I do acknowledge that interest rates must come down,” Oigara said. “But this has to be done in a progressive manner taking into account all the elements that contribute towards high interest rates so that it is a sustainable solution.”
KCB’s shares plunged 9.9 percent on Thursday, the biggest decline in 13 years, to 29.50 shillings, the lowest level in almost four years. Oigara said the drop was “an over-reaction.”
“I would say that’s a very extreme reaction largely by international investors, they are very nervous,” he said. Those nerves might be calmed once the central bank provides clarification next week on how the new law will be implemented, Oigara said.