Housing and insurance sector in Kenya to reap from interest cap

NAIROBI: Potential home owners could be the biggest beneficiaries of the interest capping law, as bank customers prepare to cash in on cheap loans.

Housing developers will also enjoy lower finance costs and might pass on this benefit to home buyers, a new research by Britam Asset Managers has found out.

“If banks don’t take upon a policy of credit rationing and exclude a large number of their customers from credit, then many will be tempted by the cheap mortgages that will be available,” said Kenneth Kaniu, CEO, Britam Asset Managers during a media briefing yesterday.

The insurance sector is another segment that is anticipated to grow as a result of the new law. Banks could be pushed to grow their non-interest income sources. One of the lowest hanging fruits in terms of non-interest income might be bancassurance business. This is where banks sell insurance products and receive commission on the sales from insurance companies.

“We might see more banks seeking approval to offer bancassurance products, which will increase insurance penetration from its current level of 2.8 per cent,” Mr Kaniu added.

Grow shareholder value

Britam said the interest capping law is also expected to squeeze medium and small banks’ margins more than those of large banks, ultimately leading to lower net interest income for the medium and small banks.

The report asserts that large banks could capitalise on economies of scale to drive growth in non-interest income. Most big banks have wider distribution networks which encourage their customers to carry out more transactions, for example ATM withdrawals, thus earning more.

They are also more active in driving other income growth from investment banking, stockbroking, bancassurance as well as active trading of government securities. Advantages that smaller banks do not have, and unlike the big banks, depend mostly only on interest income.

Despite controlling 58 per cent of banking assets, the seven largest banks command 70 per cent of the sector’s profits indicating that they are able to better sweat their assets and grow shareholder value. “Medium and small banks suffer higher non-performing loans due to their high exposure to credit risks,” Kaniu said.

The implementation of the new law will also need the Government to meet its financial obligations towards the private sector on time.

Most contracts granted to private companies go for long without being honoured and this means that contractors will be unable to repay their loans on time, a situation that could derail their credit ratings with banks.

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