Kenya Banks Face New Row with Lawmakers over Deposits Plan

NAIROBI (Capital Markets in Africa) – A new row is brewing between Kenyan banks and parliament after a lawmaker proposed placing restrictions on deposits by state-owned companies, months after the state imposed a cap on lending rates.

Kimani Ichung’wah, vice chairman of the Public Investments Committee, drafted a bill seeking to bar state-owned corporations from investing or depositing public funds with lenders in which the government has a stake of less than 20 percent. Ichung’wah declined to specify when the bill will be presented to legislators, though Parliament resumes sitting later on Tuesday.

“The bill seeks to provide that a public body may only deposit funds and invest surplus funds in government-owned banks,” he said by phone on Monday. “The bill defines a government owned bank as a bank in which the government owns or holds at least 20 percent of the shares.”

Shares in Kenya’s biggest banks have fallen as much as 27 percent since the government introduced a law Aug. 24 capping commercial lending rates at 400 basis points above the official benchmark rate. The ceiling is likely to curb growth in East Africa’s biggest economy this year, the International Monetary Fund said in November.

The proposed new law would result in government funds being channeled to various ministries, departments, agencies and counties through either the central bank or the five banks in which the government owns at least 20 percent: KCB Group, National Bank of Kenya Ltd., Consolidated Bank of Kenya Ltd., Development Bank of Kenya Ltd. and the Kenya Post Office Savings Bank.

‘Major Disruption’
Enactment of the bill would be a “major disruption” to Kenyan banks and could spark a liquidity crisis like one that erupted in neighboring Tanzania after that country introduced a similar law, ApexAfrica Capital Ltd., a Nairobi-based brokerage, said in an e-mailed research note.

“Withdrawal of deposits, in essence, is estimated to dent the banks’ deposit books, lowering the credit multiplier which may stifle the already sluggish private sector credit growth,” it said. “In an electioneering period, the legislators may pass this law in a bid to entice the electorate.”

Kenya is scheduled to hold presidential elections in August. President Uhuru Kenyatta’s decision to cap interest rates fulfilled a pledge he made before the previous vote in 2013 to cut the cost of borrowing.

Kenya Bankers Association Chief Executive Officer Habil Olaka didn’t answer three phone calls seeking comment.

Lending Criteria
Ichung’wah said the bill aims to ensure that interest on the deposits with commercial lenders is returned to the government instead of being paid to managers of state-owned corporations.

“People have a motivation to hold money because of what they are getting in interest payments, and this slows down the absorption of funds for development,” he said. “This will ensure absorption of government funds for development is quicker.”

Under the proposed law, Ichung’wah said public entities would only be allowed to place deposits with a commercial bank if they met certain criteria, including confirmation in writing that they would receive a higher return than the amount offered by government securities. The entities would also need approval from the cabinet to place deposits with lenders in which the government has less than a 20 percent stake, he said.

Kenyan banks are the biggest creditors to the government, accounting for 52 percent of the total domestic debt, according to central bank data.

The industry’s stock of non-performing debt jumped 54 percent to 191 billion shillings ($1.8 billion) in the year through June 2016, compared with growth of 21.9 percent in the previous 12 months, according to central bank statistics.

Loans soured as the regulator tightened rules on how to classify and provision for bad credit. They also climbed with rising interest rates and due to delayed government payments for contracts. Profit before tax increased by 5.4 percent to 81.2 billion shillings, slower than the 8.5 percent expansion seen a year earlier.