Photographer: Chris Ratcliffe/Bloomberg

StanChart Urges Kenya to Scrap Rate Caps as Growth Jeopardized

  • Kenyan banks cut back on unsecured lending after rates law
  • Lenders to feel full impact in 2017, StanChart Kenya CEO says

Kenyan legislation aimed at increasing lending is having the opposite effect and needs to be reviewed before it causes more damage to the economy, according to one of the country’s biggest banks.

President Uhuru Kenyatta, who will seek a second term in general elections in August, introduced the law limiting interest charges on loans to 400 basis points above the Central Bank of Kenya rate in August, fulfilling a campaign pledge he made before coming to power in 2013. The move failed to boost credit growth, which slowed to 4 percent in March, from 20 percent in December 2015. The International Monetary Fund estimates the law could reduce economic growth by as much as 2 percentage points a year.

“The law is not working as it was intended,” Lamin Manjang, 53, chief executive officer at Standard Chartered Bank Kenya Ltd., said in an interview in Nairobi, the capital, on Monday. “Banks are hurting, clients are hurting, and, of course, the impact that it’s having on gross domestic product is across the board. Everybody is negatively impacted.”

The rule has made it difficult for lenders to price loans as riskier customers cannot be charged higher rates, which means they have been forced to “significantly cut back” on unsecured lending, Manjang said. Instead of lending, banks are buying Treasury bills and government bonds as “an alternative investment,” he said.

‘Full Impact’

The Kenyan unit of London-based Standard Chartered Plc last month said profit before tax surged 43 percent to 9.04 billion shillings ($87 million) in 2016 as income from interest charges rose and non-performing loans remained little changed. The stock has gained more than 13 percent this year on the Nairobi Securities Exchange, the biggest increase after NIC Bank Ltd. and KCB Group Ltd. among the nation’s 10 largest lenders.

“In 2017, we are going to feel the full impact of the rate cap,” Manjang said.

Equity Group Holdings Ltd., Kenya’s biggest bank by market value, reported its first drop in annual profit since becoming a fully fledged commercial lender in 2004. KCB Group Ltd., the largest lender by assets, last month posted full-year net income that fell short of analyst estimates, with profit growth slowing to 1 percent after provisions surged.

The law has led to a slowdown in credit to small- and medium-sized companies and the government is exploring solutions “so that credit can start to flow again to the real drivers of our economy," Kenyatta said last month.

Manufacturing, real estate, trade and private households are hamstrung by lack of credit, central bank Governor Patrick Njoroge said on March 28, adding that the government is still weighing the full impact of the law on credit growth.

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