Demand for banks loans spike after lending rate cap

Kenya’s biggest lender by assets KCB on Wednesday reported a five-fold increase in average monthly lending to individuals, signalling rising interest in borrowing since the coming into force of a new law capping of interest rates.

The bank said it had lent out Sh6.3 billion in three weeks, disapproving earlier fears that the new loan prices would deter banks from lending to individuals, who are deemed to carry the highest risk in the lending market.

“We were lending Sh1 billion a month in new personal loans under the old regime, but that has now risen to Sh6.3 billion in the past three weeks,” said KCB chief executive Joshua Oigara, adding that most of the lending had come as top-ups on existing loans.

“More than 50,000 customers have topped up their loans since September 1, some applying even before the new rates were gazetted on September 14,” he said.

The KCB boss said the numbers were a confirmation of the fact that the new rates had offered customers an opportunity to refinance their loans, opening new business opportunities for banks.

“There were concerns that banks would refuse to lend, but we have seen a double digit growth in lending – a trend we expect to persist till the end of the year,” he said.

KCB’s loan book grew by Sh27 billion to Sh347.3 billion between June 2015 and June 2016, averaging Sh2.25 billion in additional loans per month.

The bank also reported that it had seen a surge in borrowing on its mobile phone platform KCB M-Pesa, where interest rates are also capped at an annual rate of 14 per cent.

The platform, which attracts an average of 30,000 loan applications per day worth between Sh50 million and Sh100 million (although not all are cleared), hit peak demand last Thursday when it received applications for more than Sh120 million -- causing a technical hitch that forced the bank to disengage the system to upgrade capacity. It resumed operation on Wednesday.

READ: KCB resumes mobile-based lending after six-day break

Co-operative Bank, another top tier lender, has also revealed that it is now processing between 1,250 and 1,300 new loan applications daily, up from an average of 250 before the rate caps.

The bank said earlier this week that 70 per cent of its new loan applications this month were requests for refinancing of existing loans, without indicating how much it had actually disbursed.

“Majority of these new loans are personal loans that are paid through a check off system that downplays the negative risk on asset quality. Thirty per cent of the loan applications are by new customers whereas 70 per cent are old customers reaching out for refinancing opportunities,” the lender told investment bank Dyer & Blair in analysts briefing. 

Co-operative Bank is therefore projecting that its loan book will grow by 12.3 per cent to about Sh234.2 billion for the financial year ending December 31 from Sh208.6 billion last year.

Standard Chartered Bank Kenya chief executive officer Lamin Manjang was, however, more cautious in his response to the new developments, insisting that while the banking sector is experiencing significant changes following the enactment of new legislation, definitive trends will only become clearer in the longer term.

“It is too early to discern market trends at this point.  Observation of customer behaviour over a slightly longer period will give us a more accurate picture,” said Mr Manjang.

One of the arguments advanced by some banks and industry experts who were opposed to the loan rate cap was that it would starve the private sector — including individuals, small businesses and corporations — of credit.

Banks are now required by law to charge no more than 14 per cent interest on loan products, which is the Central Bank Rate (CBR) of 10 per cent plus four percentage points.

Although banks have increased lending to government as a result of the new law, interest rates on the risk free short term Treasuries have been coming down as CBK continues to reject high priced bids.

The fact that more banks are now lending to government is actually good for the market, because it will ultimately push down the cost of government securities and eventually the cost of credit in the market,” said Mr Oigara.