Customers who had applied for loans and received approval are racking up high commitment fees as they postpone making withdrawals because of the prevailing shaky business environment.
According to the banking sector’s lobby, Kenya Bankers Association (KBA), many banks are stuck with approved loans as customers employ a wait-and-see attitude ahead of next week’s repeat presidential election.
The association's Chief Executive Officer Habil Olaka said in Nairobi Thursday the current political standoff over electoral reforms and the uncertainty surrounding the planned election had made it difficult for borrowers to commit the funds to any projects.
“There have been approvals but people are not coming to take the loans because of this wait-and-see attitude by both domestic and foreign investors,” said Mr Olaka.
Speaking to The Standard after releasing the findings of a report on the impact of the interest rates cap introduced last year, Mr Olaka said investors were in limbo about whether to invest now or wait until after the election.
“Most local investors, whose part of their investment was meant to be sourced from credit and want to make investment decisions, are opting to delay it until there is a clear course of action,” he said.
The wait, however, comes at a price, with investors incurring high commitment fees on their loans.
A commitment fee is charged by a lender to a borrower to compensate the lender for providing access to a potential loan because it has set aside the funds for the borrower but cannot charge interest yet.
The borrower pays the fee in return for the assurance that the bank will supply the loan at the specified future date and at the agreed interest rate, regardless of conditions in the financial and credit markets.
In Kenya, the fee varies from bank to bank.
“Sometimes, as the investor, you would rather incur that commitment fee than draw down the money and incur the actual total cost when you are not able to deploy that money,” said Olaka.
Meanwhile, commercial banks reiterated their position that the interest rate cap should be repealed.
Through the study that covered 25 banks with a combined market share of 77 per cent, the bankers said the law had caused an unintended impact on the pace of credit to the economy.
“Some inevitable adjustments are evident as banks seek to remain in business. We see a slack in loans on account of weak customer savings,” said Olaka.
According to Jared Osoro, KBA's director of research, banks are now skewing their deposit base to Government securities, secured loans and other short-term facilities at the expense of lending to segments whose risks cannot be covered by the capped rates.
“Banks are focusing on effective management of cost of funds. The loans are also getting skewed to secured loans and trade financing,” said Mr Osoro.
Their report, the third since the introduction of the interest rates cap, supports similar positions taken by the Central Bank of Kenya and International Monetary Fund that have argued that the law has failed to stimulate credit growth.