Banks in Kenya take a knock as new law on interest is signed in
SHARES of Kenya’s biggest banks plunged after President Uhuru Kenyatta signed a law that caps the interest rates lenders can charge on loans and set minimum payments on deposits.
KCB Group, the nation’s largest bank by assets, led the slump to head for the steepest decline in 13 years after Kenyatta signed the law, saying he sympathised with Kenyans frustrated by the cost of credit and poor savings rates. Co-operative Bank plummeted the most on record, while Equity Group Holdings, the market leader in terms of value, fell to the lowest in 16 months.
“Bank margins are going to thin out,” said Faith Atiti, an economist at Commercial Bank of Africa in Nairobi. “This is uncharted territory for most banks, especially those struggling with high non-performing loans and with a huge retail exposure.”
Kenyatta announced after the stock market had closed on Wednesday tha he had assented to amendments to the Banking Act, requiring that lenders peg credit costs at 400 basis points above the benchmark central
We were not expecting that. We were expecting the president would refer it back to parliament.
bank rate (CBR). The law also compels financial institutions to pay interest of a minimum of 70 percent of the so-called CBR on deposits.
Kenyan lenders extended loans at a weighted average rate of 18 percent in June, according to the most recent statistics from the central bank, compared with 15.7 percent a year earlier. In comparison, the central bank has cut the CBR by 1 percentage point to 10.5 percent this year. It also lowered the Kenya Bankers’ Reference Rate, or KBRR, by 97 basis points.
Top executives at the country’s lenders were surprised by Kenyatta’s decision, Kenya Bankers Association chief executive Habil Olaka said in Nairobi.
Not clear
“We were not expecting that,” he said. “We were expecting the president would refer it back to parliament” before signing it.
Lenders were not clear whether the KBBR or the CBR would be used to determine what rate banks could charge, nor did they know whether the cap would affect existing loans or money borrowed by clients in foreign currency, Olaka said. They were consulting the central bank for clarity, he said.
KCB Group dropped 9.9 percent, the most since August 2003, to 29.50 shillings (R4.02) as of 2.32pm yesterday in Nairobi, the lowest on a closing basis since December 2012. I&M Holdings slid 9.8 percent, the most since December 2013, while Equity tumbled 9.7 percent to 32.50 shillings, the weakest since April 2014.
Standard Chartered Bank fell by 1.45 percent to 204 shillings, as investors focused on the lender’s relative aversion to retail loans, according to Nairobi-based Bonsai Capital Director Ben Nyamweya.
“Kenyan banks loan rates are too high,” said Jacques Nel, a senior economist at Paarl, South Africa based NKC African Economics.
“It might not be the best way to do it, but the government was running out of options. The rate cap presents opportunities for consolidation, for smaller banks it’s definitely going to be bad.”