Kenya's Largest Bank Expects Rate-Cap Removal in Second Half

  • Law capping rates a ‘temporary aberration,’ central bank says
  • Revenue across industry may drop as much as 25%, Barclays says

Kenya’s biggest bank by assets expects the government to remove a cap on commercial interest rates in the second half of this year after the measures failed to spur lending and instead put revenue under pressure.

“I am very confident that a workable solution between the industry and lawmakers would be achieved most likely by the second half of this year,” KCB Group Ltd. Chief Executive Officer Joshua Oigara said in an interview Tuesday in the capital, Nairobi. “It’s something we never want to happen to us again. It’s a great lesson for us as an industry.”

Lenders face a drop in revenue of as much as 25 percent and are being forced to reduce costs by closing branches and cutting jobs to offset the decline, Barclays Bank of Kenya Ltd. CEO Jeremy Awori said in an separate interview. Banks have scaled down unsecured lending to small businesses and individuals where they are “finding more strain” as the caps make it difficult for lenders to price risk, Awori said.

President Uhuru Kenyatta introduced the cap in August, ignoring the advice of the Central Bank of Kenya and the Treasury, as he sought to fulfill a 2013 election campaign pledge to lower cost of credit. Kenyatta will seek reelection on Aug. 8 and he’s unlikely to remove the ceiling before then, Teneo Strategy analyst Ahmed Salim said last month. The caps limit interest charges to 400 basis points above the central bank’s key, currently at 10 percent.

Central bank Governor Patrick Njoroge said the caps are a “temporary aberration” and the country will return to allowing interest rates determined by the market in future.

“The norm is a market determination of interest rates,” Njoroge said. “When we will get there, how we are going to get there, I cannot speculate on that.”

Credit Slowdown

The caps have failed to halt a slowdown in the amount of credit banks provide to the private sector, with the rate of growth declining to 4.9 percent in December, the slowest pace in 13 years, according to data compiled by Bloomberg. The International Monetary Fund, which forecasts Kenya’s economy will expand 5.3 percent this year, has warned that the caps could shave two percentage points off GDP unless they’re removed.

Earnings at KCB will probably be little changed this year as loan growth stagnates, Oigara said. “To remain flat is not a bad position considering the interest-rate caps,” he said.

The lender earlier on Thursday reported a 1.9 percent decline in first-quarter profit as net interest income, the money banks earn from interest charges on loans, shrank 5.5 percent to 10.3 billion shillings ($99.6 million).

Prior to the introduction of the ceiling, Kenyan banks were charging an average of about 18 percent for loans, according to central bank data.

“Even if the rate cap was removed, I don’t think we have a chance to get back to those high rates,” Oigara said. “But banks must also be able to have a pricing model that meets customers at their credit-scoring points. We need to have differentiated pricing for customers based on their risk profile -- that’s what was missing before and that’s why we went into this regime.”

Kenyan Treasury Secretary Henry Rotich didn’t answer calls to his mobile phone and Principal Secretary Kamau Thugge wasn’t immediately able to take questions on Thursday when Bloomberg sought comment on the possible timing of the cap’s removal.

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