Banks defy interest rate cap to rake in big profits

Equity Bank Group Chief Commercial Officer, Polycarp Igathe (left) makes remarks during the release of Equity Group Holdings Plc 2018 Half Year Financial Results at Equity Centre. [Wilberforce Okwiri/Standard]

Commercial banks have defied the interest rate regulations to rake in more billions against a sustained attack on the controls that have cushioned millions of borrowers.

Top bankers announced huge profits contradicting their prior warnings that controlling lending rates would hurt the banking sector.

KCB, Equity and Co-operative banks collectively reported more than Sh30 billion in net profits in just six months, against all predictions of doom in the industry. All the three grew their after-tax earnings by more than a tenth.

Stanbic Bank more than doubled its profits, helped in part by swelling earnings from the interest charged on loans.

Nothing could better burst the myth than the very numbers released in this earning season, with the trend widely expected to cascade to smaller lenders.

At stake is the livelihoods of millions who are seeking or already servicing bank loans should the interest rate cap be shelved and borrowers left at the mercy of lenders.

Cofek shock

Consumers Federation of Kenya (Cofek) expressed shock at the size of bank profits, especially in the period they have ‘cried loudest’ about interest rate controls.

Stephen Mutoro, the secretary-general of Cofek, said the control on lending rates should be tightened even further to cushion ordinary borrowers.

“Banks are making abnormal profits but at the expense of the millions of poor Kenyans. I think they should be squeezed further,” he said.

Interest on loans are currently capped at 13 per cent, more than four times the risk of default among ordinary salaried borrowers. Mr Mutoro was participating in the ongoing debate about whether the controls should be abolished, as proposed by the National Treasury Cabinet Secretary Henry Rotich acting on pressure from international institutions.

Among the biggest proponents of repealing lending rates cap are the banks themselves, supported by the International Monetary Fund (IMF).

Most of the banks are owned by international investors, either individual or pooled funds, which might explain the position taken by global organisations.

The US-based lender has claimed that interest rate controls are curtailing the space for banks to lend because they cannot charge bad borrowers higher rates to make up for their risk of default.

But the view that banks would lend to the perceived riskier borrowers has been challenged by senior economists, who say the lenders have always shunned small enterprises anyway.

IMF has placed a repeal of the interest rate regulation among the stringent conditions for the continued support, including a Sh150 billion standby loan which Kenya could have access to in order to stabilise its currency.

An economic adviser to President Uhuru Kenyatta has been quoted as saying that repealing the rate capping laws would only help banks to increase their profits at the expense of borrowers.

“Commercial banks aren’t likely to change their behaviour because we have done away with the rate cap; they will immediately increase lending rates and defeat the intended purpose of increasing credit to the private sector,” Mbui Wagacha was reported in a local daily.

Chief executives Joshua Oigara of KCB and Equity’s James Mwangi, in their respective investor briefings yesterday, threw their weight behind the proposals to scrap the law on the interest rate cap.

Banks are also drawing huge gains from technological developments, including agency, internet and mobile banking that have helped boost the industry’s profitability and attractiveness to investors.