Insurers to feel heat of loan capping law – ICEA

The law capping interest rates charged by banks will depress revenues of insurance companies whose earnings from term deposits are set to fall, analysts from financial services group ICEA Lion’s asset management arm have said. In a research note, they said the controlled interest rate regime will lead to lower margins for some insurance products. “Revenue for the insurance industry is likely to decrease as margins from some of their products decrease, for example, credit life and investment income from bank deposits,” said the firm in the research note. “Banks are likely to lower their deposit-taking rates to protect their margins.” This spells an even more painful year for the insurance industry whose net profit dropped last year to Sh9.73 billion from Sh17 billion the previous year, according to data compiled by Insurance Regulatory Authority. The law caps the rate of interest on bank loans at four per cent above the base rate, a grey area in the law as there’s contention on whether to use the Central Bank Rate or the Kenya Bank Reference Rate when pricing loans. At the moment, lenders have capped the rate at 14.5 per cent, meaning they are using the CBR as the base rate.