The recent capping of the interest rates by the Central Bank of Kenya (CBK), pictured above, which limits commercial banks’ lending rate at 14% or 400 base points above the CBK rate of 10% sets a rather bleak future for domestic investors in the country. A turn down of loans to borrowers with the major decision settling at the government’s side, as a borrower, was the most immediate reaction banks had when the law was put in place.
With borrowers in a prompt move to secure the never to be ‘ cheap loans’, despair was experienced by majority of them as banks locked the lending ‘doors’ citing non-profitability on their side; a fact which was to be announced later by all banks.
But on a rather different twist of events, some banks, including Kenya’s largest bank in terms of asset accumulation and profit margins, Kenya Commercial Bank (KCB) opted to proceed with the law, only to reap as low as 0.5% growth in its first quarter returns(December 2016- March 2017). The CBK Governor, Dr. Paul Njoroge, pictured above to the left, more adamant on the implementation of the new law , was met with a faint heart towards the sink in the prolonged profits made by commercial banks.
The anticipated reduction in profits by banks saw many of them opt not to lend to ‘small borrowers’ but direct their loans to large firms and the government, who have much higher returns and default-free, As earlier explained, the intention of this law was to stimulate the economy by increasing credit accessibility to customers. This was , however, thwarted by the banks when they ceased lending to individuals and chose credit-worthy corporate and government agencies in general.
If the later is true, then the sole reason for the passing of the bill was not achieved as expected. Lawmakers will have again to make considerations on whether to wither the law away or make amendments to it. As this continues to unfold, politicians took in the issue citing improper gauge in reference to the reaction of the commercial banks. Our eyes remain open to see whether these changes will be effected or not.