The Central Bank of Kenya (CBK) Governor Patrick Njoroge has heightened his pitch for deregulation of interest rates, saying that reversal of the year-old law is necessary because of the negative effect it has had on the economy.
But consumer lobbies and some economic experts now warn that while the subsequent credit crunch after the law was effected last September bear serious implications to the private sector, scrapping the controls may not be the panacea, and would in fact lead the country back to the era of high rates whose consumer outcry prompted the controls in the first place.
The Banking (Amendment) Act, 2016, which came into force on September 14 last year, caps loan charges at four percentage points above the Central Bank Rate (CBR), presently standing at 10 per cent, and requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.
President Uhuru Kenyatta last August defied critics and overruled some of his top advisers, including the CBK governor who publicly declared their opposition to the law, arguing that it would distort the market. Banks now say after this income from lending has fallen.
“Banks aren’t lending because they are not able to price in risk adequately into an interest rate so their margin of profit has shrunk on account of the rate cap as it doesn’t allow for full pricing of default risk by the bank,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers.
Growth of credit to the private sector fell for the eighth straight month in May following the introduction of the law.
CBK data shows loans to the private sector fell further to 2.1 per cent over the 12 months to May this year down from the 2.4 per cent recorded in April.
Private sector credit, however rose to 1.6 per cent in August from 1.4 per cent in July, but far from the over 17 per cent in December 2015.
Njoroge has argued that commercial banks in a post rate cap environment have to be “more disciplined in the pricing of loans so as not to overcharge borrowers.”
The caps shaved Sh26.3 billion off commercial banks’ lending income in the first six months of the year, setting them for lower profitability this year.
“All I can tell you is that it is in our interest as a country. It is in our interest as a central bank to work to reverse these measures and go back to a regime where interest rates are freely determined, but in a disciplined environment,” Dr Njoroge has said.
“What needs to change is the discipline among lending institutions. They cannot go ahead setting interest rates the way they were doing before. And it is our job to deal with them in the context of that market discipline.”
But consumer lobbies and a section of economists are now questioning the spirited push for deregulation by banks and the governor warning that removing the rate controls without critical structural reforms will not necessarily solve the perennial challenge of high rates charged to consumers.
“It is laughable that Dr Njoroge thinks a website by the banks and for banks will enhance transparency in pricing of credit. It’s akin to imagining possibility of different results if the same formula is applied. Dr Njoroge is a captive of banks and the unrealistic IMF ideologies which purport a protectionist view of the market by over-exposing the consumer,” said Consumer Federation of Kenya (Cofek) secretary general Stephen Mutoro.
While admitting price controls are inherently problematic, Mr Mutoro claimed banks have ensured the rate caps are unworkable.
“I do not support price controls but from the experience of fuel price setting by Energy Regulatory Commission it has proven that banks can only be tamed by restrictions in pricing their loans,” he said.
According to Standard Investment Bank head of research, Francis Mwangi, the race for better returns in an increasingly competitive regulatory and legal environment is likely to compel banks to chase for better returns for shareholders.
This may leave customers exposed to higher rates unlike posited by the Central Bank governor.
“The IFRS 9 exerts much more pressure on banks to try and charge more. So if that is removed there is strong likelihood that prices for loans will go back to where they were before,” says Mr Mwangi.
The implementation of the International Financial Reporting Standard (IFRS) 9 from January 1, 2018 will come with stringent conditions on how banks account for non-performing loans which is expected to trim the size of their of loan books.
Independent analyst Aly Khan Satchu said the era of high returns for lenders is gone and they should readjust their banking models other than seek to squeeze huge margins from borrowers.
“My overarching sense is that the horse has bolted and that banks still have to take significant pain in right-sizing their businesses and take further cost out of the equation. Furthermore, The new digitised banking world is moving into clear view,” said Mr Khan.
Mr Khan argued that even with the scrapping of rate cap unless the Treasury tames its appetite for local debt there is bound to be continued crowding out of the productive sectors of the economy from the loans market.
“The Government of Kenya will have to reign in their borrowing appetite,” he said.
Mr Kuyoh said the CBK needs to be more proactive in ensuring an adequate and effective way of credit pricing.
“The micro lenders like Branch, Alternative Circle and Tala have already devised a ringfenced mechanism using consumer data to price credit and this is a step in the right direction that the regulator and the mainstream banks seem to be playing catch up to,” he said.