“We have learned our lessons.”
That’s the message that KCB Group CEO and the Chairman of the Kenya Bankers Association Joshua Oigara is telling bank customers a day after the National Assembly lifted the cap on interest rates that had been in place since 2016.
Oigara said customers should not expect a sudden increase in the interest rates following the amendment of the Finance Bill, 2019 to accommodate the President’s Memorandum.
“The regime of the 20 percent interest rate is long gone. The macroeconomic and business environment where we are today does not at all support an environment of high rates,” said Oigara.
Oigara said allowing banks to price the risk of borrowers is important and the banking industry has over the last two years learnt a number of lessons in that regard.
“As an industry, we are in a new equilibrium. Banks have reached a new business model. We lend to current customers at 13% because we have accepted their risk profile as an industry. That will not change the next day. So the fear that there will be a massive repricing the next day is not true,” Oigara highlighted.
The net effect of the capping has been a credit squeeze and a slowdown in lending especially towards Small and Medium Enterprises, whose risk profile is perceived to be higher than that of bigger and more established businesses.
“Banks are ready to lend. So we are going to see more people including SMEs start accessing credit in the industry. Customers with high-risk profiles may see a 2-3% increase. We are not going to see a massive change. As a leader in the industry, we don’t see an opportunity to go back to the old behavior of high rates,” Oigara added.
The banking industry has over the last two years experienced the full impact of the amendments to the Banking Act made in 2016 introducing limitations on the chargeable interest on credit.
The unintended effect of the interest rates cap has a result been negative across the banking sector and the economy, especially amongst the SMEs, and any efforts to correct the situation will be good for every interested party.
The 19th Kenya Economic Update (KEU) by the World Bank, attributes the slack on the demand side of the economy to two factors: Insufficient credit growth to the private sector (which stands at 3.4% in February 2019), and inherent room for improvement in fiscal management. On private sector credit, the report recommends fast-tracking solutions to factors that led to the imposition of the interest rate cap and building consensus for its eventual reform. On the latter, ensuring prompt payments to firms that trade with the government could restore liquidity and stimulate private sector activities.