Repealing Interest Rate Cap Would be Credit Positive

Analysts at Moody Investors Service believe that the President’s move to repeal interest rate caps augurs well for Kenya’s credit sector.

The credit rating agency suggests that the repeals would gradually lead to a higher private sector credit growth and overall economic growth.

At the same time, higher lending rates would boost banks’ profits to levels similar to pre-cap periods.

While the fate of the Finance Bill of 2019 hangs on a balance, it is likely that the parliament will repeal interest caps.

The alternative would be to override the president’s veto by a two-thirds vote in the National Assembly, which remains unlikely.

Revising the interest rate cap will no longer limit banks lending, providing a credit positive environment in the country.

SEE ALSO: What you Need to Know about Credit Scores

Moody predicts that revising the interest rate caps would provoke higher lending rates for SMEs over the next 12-18 months. Similarly, removing the interest ceiling will stabilize banks’ non-performing loans and eventually decline the NPL ratio.

While Moody is hopeful that repealing the rate cap will improve interest income in banks, it is hard to expect results similar to those in 2016, before the rate caps. However, interest rate cap repeals will sure reverse the trend of lending in banks.

Moody anticipates that the move will improve banks’ preference towards the SMEs lending over the government and corporate borrowers.

Interest Rate Repeals to Reverse Banks’ Lending Habits

Between 2016 and 2019, banks shifted credit from the private to the government sector. For instance, private sector credit grew by less than 5% in 2017 and 2018 and 6% in June 2019. This compares to a 19% investment in government securities in 2018 alone.

Additionally, banks mostly lending to individuals saw slower growth than those focusing on the government and large corporate.

For example, between December 2016 and March 2019, Equity and Co-operative banks increased their net loans by 7% and 8 % respectively.

Nevertheless, KCB group grew its loan book 20% faster, owing to its focus on large corporate clients and personal salary assigned loans.

Consequently, banks which focus on SMEs stand to benefit the most from the rate caps.