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Banks trip over themselves to raise interest rates

By Macharia Kamau | November 10th 2019
Sidian Bank was yesterday forced to retract a schedule of new loan charges. [File, Standard]

It did not take long for banks to start raising the cost of loans.

Barely 24 hours after President Uhuru Kenyatta signed the Finance Bill into law on Thursday, local lenders began adjusting their interest rates upwards, signalling the dearth of cheap credit.

This is something consumers had hoped would wait awhile, at least until the dust settles, but a segment of the industry appears to have had the memos drafted and signed, only waiting for the President's nod.

The Finance Act contains a clause repealing a 2016 amendment to the Banking Act, which had capped the cost of loans at four per cent of the Central Bank Rate (CBR).

CBR currently stands at nine per cent, meaning that banks could not charge more than 14 per cent interest on loans.

Despite assurances by Kenya Bankers Association Chairman Joshua Oigara that “the regime of the 20 per cent interest rate is long gone” and that things will not "change the next day” banks have started revising the cost of their loans.

The 20 per cent rate that Mr Oigara, who is also the chief executive of KCB, thinks is a thing of the past appears to be a reality again going by the first banks that have communicated their intent to raise cost of new loans.

“Following the signing of the Finance Bill into law by the President, which among other provisions repeals section 33b of the Banking Act that provides for the capping of bank interest rates, the bank has reviewed interest rates for various products based on the associated credit risk,” said Sidian Bank Chief Executive Chege Thumbi in a memo to employees dated November 8.

According to the schedule that credit officers will use to price credit, the bank will charge interest rate of up to 19 per cent on most of the loans that include those advanced to small and medium enterprises, retail customers and mobile loans.

Large companies will enjoy the cheapest rates at the bank of 16 per cent, which is three per cent higher than the maximum 13 per cent that banks could charge on commercial loans.

The CEO instructed his team to effect the new rates immediately.

However, the bank later denied increasing the interest rates, with sources saying the lender had been reprimanded by Central Bank of Kenya (CBK).

Banks cannot impose any charges on customers without approval from the regulator.

"The board of directors and management of Sidian Bank Limited regret the unfortunate issuance of a statement that it had reviewed and increased interest rates following the repeal of Section 33B of the Banking Act," said the bank in a statement signed by Chairman James Mworia.

"The statement by Sidian Bank that it has reviewed the interest rates is not true. The bank is committed to act responsibly and will not increase interest rates arbitrarily."

Sidian Bank is owned by Centum, where businessman Chris Kirubi is the largest shareholder.

A source at one of the leading banks said CBK Governor Patrick Njoroge seems not to want anything more than 16 per cent.

"Rate cap is out... but CEOs will get hot calls on anything more than 16 per cent," said the source.

"Previous contracts will remain but for new ones we shall use a risk-based approach."

In addition to increased rates, customers are also likely to contend with other charges including loan processing fees and insurance costs. These charges were used during the capping period and in some instances had the impact of pushing up cost of credit to as high as 20 per cent.

While cost of loans issued during the capping era was frozen to cushion customers against the sudden surge in rates that will come after review of the law, this might depend on the terms of the loan for individual customers.

Some may be exposed by the terms of their credit and their interest rates might be reviewed.

“The pricing of existing loans will be communicated in due course,” said Sidian, an indication that there could be reviews on existing loans.

The banks have since the implementation of the rate caps been pushing for its scrapping. Other than the numerous research material to show how detrimental rate caps were to the industry and the economy, banks also turned down retail customers and small enterprises, which could be interpreted as a protest.

The banks however termed the denial of credit to SMEs as an unintended impact of the rate cap. Instead, they have been lending to the Government through Treasury bonds and bills.

This year, the banks successfully lobbied the National Treasury to repeal the 2016 amendment that introduced the rate cap and Treasury had included the clause in the Finance Bill only for it to be shot down by Parliament.

The bill made it through the House but Uhuru refused to assent to it on account that MPs had removed the clause repealing the rate cap, and sent the Bill back to the MPs with a justification on why they needed to repeal the 2016 amendment.

MPs said they would shoot down the President's memorandum but could not raise the needed 233 MPs to do it.

Mr Oigara noted that while there would be a hike in the cost of loans, this would be moderate, with customers with good credit scores seeing their loans charged at the same rates as during the capping years while the risky ones would see an increase of between two and three per cent.

“The macroeconomic and business environment where we are today does not at all support an environment of high rates,” he said last week.

“As an industry, we are in a new equilibrium. Banks have reached a new business model. We lend to current customers at 13 per cent because we have accepted their risk profile as an industry.  That will not change the next day. So the fear that there will be a massive repricing the next day is not true.”

Oigara said banks are ready to lend and more people including SMEs will start accessing credit in the industry.

"For customers with high-risk profiles we may see a two to three per cent increase. We are not going to see a massive change. As a leader in the industry, we don't see an opportunity to go back to the old behaviour of high rates,” he said. 

Despite the harsh times that the banks have cited, they have posted growth over the three years that the rate cap was in place, growing at a faster pace compared to many other industries, and even the country' economy.

The industry reported a combined Sh152.3 billion in pre-tax profits in the year to December 2018, 12.3 per cent higher compared to the Sh135.5 billion they made in 2017.

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