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Cytonn: borrowing by Kenya government a threat to loan caps

By Domnic Omondi | September 6th 2016

NAIROBI: The Government’s appetite for domestic loans is a huge threat to the success of the law capping interest rates.

According to investment firm Cytonn Investments, the State will still borrow heavily from the domestic market, crowding out the private sector as lenders rush for low-risk Government securities.

“The same week when the bill (Central Bank (Amendment) Bill 2015) was signed into law, the Government borrowed at least 15 per cent, so it is borrowing at a higher rate than what they are saying banks should lend at,” Elizabeth Nkukuu, the chief investment officer at Cytonn, said yesterday when the firm released its banking report for the first half of this year.

Ms Nkukuu added that reports that the Government would postpone borrowing from the international market in the first quarter of this financial year leaves it with the domestic market, as it moves to plug a Budget deficit.

Banks have until September 14 to comply with the new law capping interest rates charged on loans at no more than 4 per cent above the base rate set by the Central Bank of Kenya.

Banks and financial institutions are also required to give a minimum interest rate of 70 per cent of base rate on depositors’ savings, a move that slashes the high interest rate spread enjoyed by lenders.

Cytonn’s investment manager, Maurice Oduor, added that banks will now be forced to come up with more innovative products, which might mean abandoning savings account.

Nkukuu said the Government should have tried to make the banking sector more competitive by strengthening other financial sector institutions, such as Saccos and investment banks.

“They should have come up with more products that could compete with the banking sector because, yes, there could be collusion in the banking sector,” she said, adding that market forces should not be limited to just banking but to the larger financial sector.

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