On November 5, 2019, Kenya’s National Assembly passed an amendment to the Finance Bill, removing a cap on commercial lending rates that has been in place since September 2016. The removal of the rate cap will no longer constrain bank lending, a credit positive.
Because banks are able to better price their risks without a rate cap, Moody’s Financial Services projects the country can expect higher overall loan growth over the next 12-18 months and increased lending to segments of the economy that have had subdued growth and access to credit, primarily small and midsize enterprises (SMEs) in sectors like trade and real estate. Along with increased loan growth, nonperforming loans (NPLs) will continue to stabilise and the NPL ratio will gradually decline, while economic growth remains strong around 6 percent in the next 12-18 months.
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The cap on lending rates since September 2016 has been one of the main reasons for low credit growth. Although deposits grew by 29 percent between September 2016 to July 2019, rather than provide loans, banks chose to invest in less risky, more liquid government securities.
In addition, when banks did lend to the private sector, they focused on less risky clients, such as large corporations and individuals. Credit grew only modestly to 6 percent by June 2019 from less than 5 percent in both 2018 and 2017, significantly below the double-digit rates before September 2016.
Profitability is expected to benefit from loan and business growth, but also higher lending rates will increase net interest income, reversing the recent years’ trend of declining income and margins. Although banks have partly mitigated the lost revenue through higher fees and commissions, a higher proportion of loans at higher interest rates would boost profitability.
Lending rates dropped to 13 percent as of year-end 2018, from an average of 18 percent in the first eight months of 2016, before the rate cap law was passed. Return on assets declined to 3.4 percent in 2018 from 3.6 percent in 2017 and 4.0 percent in 2016. (