Kenya has lifted its interest rate cap, in a move meant to revive shrinking credit access to the private sector.
Parliament failed to raise a two-thirds-majority which would have allowed it to push through the crucial Finance Bill 2019 with the cap intact, which President Uhuru Kenyatta had refused to assent to.
- The vote, held on November 5th, effectively ended Kenya’s experiment with rate caps, which were first introduced in 2016.
Kenyatta signed the bill two days later, meaning that banks are now free to determine what interest to charge on credit.
Kenya’s top bank executives, and Central Bank Governor Patrick Njoroge, have repeatedly blamed the rate cap for the declining access to credit, as banks preferred to loan to low-risk borrowers such as the government and large corporations.
On the other hand, legislators, some of whom stormed out of Parliament after the vote, have insisted that the cap was necessary to protect borrowers from high interest rates.
KCB Group CEO Joshua Oigara, however, doesn’t think rates will rise sharply any time soon because “The macroeconomic and business environment where we are today does not at all support an environment of high rates.”
- “Customers with high-risk profiles we 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 behaviour of high rates,” he added.
Credit rating agency Moody’s called the decision to remove the caps “a credit positive” in a recently published report.
- Christos Theofilou, a vice president and banking analyst at Moody’s says: “Removing the rate cap positions Kenyan banks to better price risk. We expect higher loan growth in the next 12-18 months and increased lending to parts of the economy that has had subdued development and access to credit, primarily SMEs in sectors like trade and real estate.”
Equity Bank the big winner
Analysts predict that Equity Bank, Kenya’s biggest bank by customer numbers, will be the biggest beneficiary among the country’s lenders.
- “Equity Bank’s net interest rate spreads have dropped the most since the implementation of the rate caps because it is more focused on SME lending than the other banks,” Moody’s said in the report.
- Ronak Gadhia, a director of Sub-Saharan Africa banks research at EFG Hermes Frontier, told Bloomberg that Equity Bank “also has a loans-to-deposit ratio so its capacity to lend is stronger than everybody else.”
Keep an eye on
Even with the rate cap gone however, a larger than expected fiscal deficit means that Kenya’s national finances are not out of the woods yet.
- Kenya’s senate voted on 6 November to raise the debt ceiling to 9trn shillings ($87.29 billion). The government is abandoning “a limit pegged to the GDP due to a growing debt burden.”
- Meanwhile analysts are expecting a delay to a new ‘insurance’-style facility with the IMF, to be agreed only by the end of 2020.