Banks reduce number of approved loan requests
Kenya Bankers Association director of research and policy Jared Osoro speaks during a press conference on the Banking (Amendment) Act 2016, on October 19, 2017. He has said few loan applications are being approved by banks. PHOTO | DIANA NGILA | NATION MEDIA GROUP
What you need to know:
- The law on interest rates also imposed a minimum deposit rate of 70 per cent of the benchmark rate.
- Mr Osoro said banks were willing to sacrifice profitability on a pedestal of safer investments in government securities.
Only one out of three applications are likely to be approved as banks shift focus from personal and small business loans — considered risky after introduction of the rate cap law — to short-term government securities.
A survey by the Kenya Bankers Association (KBA) tracking the market adjustments since August 2016, when commercial lending rates were fixed at four percentage points above the 10 per cent Central Bank Rate, showed while applications for loans have increased, banks are not disbursing as much.
INTEREST RATES
The report indicated there were more than 3.2 million loan applications — the highest since the rate caps came into effect — between May and June this year, but banks only approved about 1.1 million of them.
“Banks seem to be increasingly focusing on effective management of savings and fixed deposits. The shift from unsecured credit is evident,” Mr Jared Osoro, KBA director of research and policy, said at a press briefing.
The law on interest rates also imposed a minimum deposit rate of 70 per cent of the benchmark rate, which meant consumers are now getting a higher return on savings than before.
INFLATION
Mr Osoro said banks were willing to sacrifice profitability on a pedestal of safer investments in government securities despite data showing they were at times getting negative real returns on investment due to double-digit inflation in the first half of this year.
An investment has negative real returns when the rate of inflation exceeds its percentage gain.
LOANS
Kenya’s inflation trended above 11 per cent in April and May, slightly above the three-month and six-month Treasury bills yields at the time.
Banks have also introduced measures that have made it difficult for borrowers to qualify or finance their loan applications.
These include heightened scrutiny of applications and an increase in the number of prequalification fees.
The survey showed loan disbursement started declining as soon as the rate cap law came into effect.
