A law capping interest rates continues to pile pressure on Kenyan banks, with at least three banks posting a drop in earnings in the first quarter of this year.

NIC Bank, Stanbic Bank and Kenya Commercial Bank (KCB) posted 3.9 percent, 9.3 percent and 1.9 percent decline in profit, with the performance attributed to the capping of loan rates.

Kenya introduced the law to cap interest rates in the third quarter of 2016, with the move aimed at deepening access to credit especially among small borrowers.

The rates were capped at 4 percent above the Central Bank Rate which currently stands at 10 percent. Banks, therefore, are currently charging borrowers a maximum of 14 percent, down from between 18 and 28 percent.

The result, however, is that commercial banks are reeling from the effects of the reduced earnings as the law leads to unintended outcomes, including layoffs and slow credit growth.

Financial results of the three banks released last week indicated the squeeze the banks are facing following the implementation of the law. KCB posted a 1.9 decline in core earnings per share to 14.4 billion U.S. dollars from 15 billion dollars.

The bank’s profit similarly declined to 44.7 million dollars from 46 million dollars posted in the previous session.

On the other hand, NIC Bank saw its profit dip to 9.2 million dollars from 9.5 million dollars while Stanbic’s profit went down to 10.5 million dollars as the downward trend among Kenya’s 42 banks continued from the third quarter of 2016.

“The effects of interest rate capping on the banking sector are becoming more apparent as the banks post decline in core earnings per share, with net interest income also dropping,” Cytonn, a leading investment firm in Nairobi, said Monday.

According to the firm, it is clear that the enactment of the law has not served to help the situation on credit access either, besides hitting banks’ bottom-lines.

Central Bank of Kenya (CBK) data showed that the share of loans to corporates has increased relative to small businesses and personal loans since the capping of interest rates, with the number of loan applications received by banks increasing between September and December 2016.

However, loan approvals declined by 6 percent between December 2016 and February 2017.

“While the capping has rationalized interest rate spreads in the banking sector, it has led to challenges such as locking out of SMEs and other ‘high risk’ borrowers, who can not fit within the 4 percent risk margin, from accessing credit, with banks preferring to lend to government,” said Cytonn in a brief Monday.

In the wake of the squeeze amid decline in profits, the Kenyan banking sector has taken proactive measures aimed at increasing operational efficiency in response to the challenging operating environment, such as laying off staff, closure of branches, reviewing operating hours for some branches, or outright sales in the case of small banks.

Over 2,000 employees have lost their jobs as banks restructure operations and embrace internet and mobile banking.

A total of 11 banks have announced downsizing plans since the implementation of the interest rate cap as the sector adjusts to the tough environment.

Further, at least two small banks have been bought off after they were shut out from the interbank market, with others having to mobilize funds at rates higher than what they are getting now.

“Going forward, we are likely to witness banks’ push for efficiency gather pace to balance off the expected reduction in absolute profitability. The onus is on policymakers to arrest the situation before it gets out of hand, impacting negatively on the economy,” said Cytonn, noting that interest rates cap is the Kenya’s Brexit — popular but unwise.

The International Monetary Fund is among global financial institutions that have called for the removal of interest caps, noting they have negative effect on the economy in the long term. Enditem

Source: Xinhua/