Small lenders now swoop down on ‘rejected’ borrowers

 

Central Bank of Kenya Governor Dr Patrick Njoroge

Small banks are the biggest beneficiaries of the law capping interest rates as it has enabled them to increase lending to small enterprises.

The Central Bank of Kenya (CBK) said yesterday small lenders were also filling the void left by their bigger counterparts, which had slowed down lending to micro, small, and medium enterprises (MSMEs), citing low returns in the era of reduced interest rates.

CBK Governor Patrick Njoroge said that while there had been an overall reduction in lending to MSMEs, the reduction of credit to the sector was by large lenders.

On the upside, however, small banks had snapped up the customers turned away by the big players. This has seen a rise in the amount of loans being advanced to the MSMEs by the small banks.

“Commercial banks’ lending to MSMEs fell by an estimated 5.7 per cent between August 2016 and April 2017, but small banks recorded increased loans to the sector on aggregate,” said Dr Njoroge during a press briefing in Nairobi, a day after the Monetary Policy Committee retained the benchmark rate at 10 per cent.

The action by CBK’s decision-making organ was a relief for borrowers, who will continue to enjoy reduced cost of credit.

Lower value loans

It was, however, a blow to lenders who have had to contend with shrinking profit margins since the introduction of the new interest rate regime last September, prohibiting them from charging interest at not more than 400 basis points above the benchmark rate. This means the maximum rate they can charge on loans is 14 per cent. Njoroge said since the interest rate cap law came into force, there has been a growth in the number of loan applications, but borrowers were increasingly asking for lower value loans.

Banks have also adopted stringent requirements that lock out numerous loan applicants. “Loan applications grew, especially the smaller-size loans. The number of loan applications grew 23.4 per cent between August 2016 and April 2017, but the value of loan applications decreased 18.3 per cent, suggesting smaller sizes of loans,” said Njoroge

“There has been a tightening of credit standards, resulting in lower volumes as riskier borrowers are kept out. The number of loan applications, however, does not capture the people that may have wanted to apply but did not because they felt that their applications would not go through.”

He said the reduced credit advanced to MSMEs by large banks was of concern, considering that the sector played a major role in job creation.

“A reduction in lending by large banks to small enterprises is a concern because this (MSME sector) is where the jobs are being created and also where the output for growth will take place.”

Njoroge also said CBK was pushing to have banks adopt new business models.