Kenyan Treasury Bats for Banks as Rate-Cap Battle Looms

NAIROBI (Capital Markets in Africa) – Kenyan lenders have strong allies in a bid to overturn interest-rate caps that have eaten into earnings. But support from the central bank and Treasury might not be enough to restore the stellar profits they once enjoyed.

Treasury Secretary Henry Rotich surprised lawmakers last week by saying he plans to repeal legislation limiting borrowing costs, backing calls by central bank Governor Patrick Njoroge who has complained the rule complicates monetary policy by making credit demand hard to predict. The officials are going head to head with parliamentarians who have vowed to resist any efforts to water down the act they say has helped people get cheaper loans.

“Don’t expect the banks’ margins to go back to the levels they were before,” said Vinita Kotedia, a macro-strategy analyst at EFG Hermes Kenya Ltd. in Nairobi. “This is partly because there are other underlying challenges the banks are dealing with: one of which is asset quality.”

The measure — introduced in August 2016 to fulfill an election pledge by President Uhuru Kenyatta to improve lending terms — exacerbated a slowdown in credit growth, with banks citing their inability to compensate for riskier customers by charging higher interest rates for the slump. Jude Njomo, the lawmaker who proposed the amendment, said members of parliament don’t trust banks, which are still profitable.

Risk Fee
The Treasury has said it is looking at proposing a risk fee that lenders can charge on top of the maximum interest rate, which might give banks “additional room to lend,” Faith Mwangi, an analyst at Exotix Capital in Nairobi, said in a June 6 note.

The average return on equity among nine of the country’s biggest lenders declined to 15.1 percent last year compared with 17.4 percent in 2016 and 24.8 percent in 2011, according to data compiled by Bloomberg. South African lenders had an ROE of 17.4 percent in 2017. Non-performing loans among the seven banks tracked by Exotix weakened to 9.2 percent of total credit in the first quarter, compared with 6.8 percent at the end of 2017.

Shares of Kenya’s biggest banks — KCB Group Ltd. and Equity Group Holdings Ltd. — advanced 0.5 percent each by 9:45 a.m. on Monday, the first day of trading since Rotich announced the proposal on Thursday.

Parliament will resume sitting on Tuesday, when it’s expected to begin debating the budget, majority leader Aden Duale said by text message.

Even if the banks manage to get the law changed, they will still have to deal with Rotich’s proposal to establish a financial-markets regulator, something which he and the central bank governor don’t agree on, with Njoroge saying the bill will curtail his ability to regulate lenders.

If the draft Financial Markets Conduct Bill does become law, then it will just create another form of policing the interest rates charged by commercial banks, said Kotedia of EFG Hermes.

Source: Bloomberg Business News