Roundup: Kenyan banks face huge drop in earnings after interest capping

Commercial banks in Kenya are facing declined earnings after President Uhuru Kenyatta signed into law a bill to cap interest rates.

The law that will come into effect in one month is expected to hugely cut earnings for the banks, whose major source of income are interest rates.

Under the new interest rates regime, banks will not be allowed to charge on loans more than 4 percent above the Central Bank of Kenya rate, which currently stands at 10.5 percent.

As a result, interest charges for some commercial banks in the East African nation would drop by about half, foreboding tough times for them in coming months.

In the recently released half-year results of several banks, the financial institutions attributed their super earnings to interest incomes.

Kenya Commercial Bank (KCB), the country's largest bank by assets, reported a 14-percent rise in half-year net profit to 11 million U.S. dollars thanks to higher interest income from customer loans.

The listed lender's net interest income rose by 16 percent to 23 million dollars in the six-month period on higher lending charges coupled with an expanding loan book, which grew by 27 million dollars (8.3 percent) to 3.4 billion dollars.

Equity Bank, similarly, registered an 18-percent growth in net profit, which rose to 10 million dollars aided by a spike in lending rates on customer loans.

Another listed lender, the Co-operative Bank, during the six months too posted a 19-percent jump in net earnings on higher interest income.

The tier-one bank reported its half-year net profit rose to 7 million dollars, compared to 6 million dollars that the bank recorded during a similar period in 2015.

Income from loans and advances grew by 3 million dollars to close the period at 17 million dollars as the bank's loan book increased to 2.2 billion dollars.

Meanwhile, the banks' non-performing loans continued to grow, an indication of how high interest rates of between 20 and 30 percent were hurting borrowers.

KCB recorded a 36-percent increase of bad loans during the six months to 33 million dollars, and increased its loan loss provision by 51 percent from 13 million dollars to 21 million dollars in three months.

"Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent," said President Kenyatta after signing the bill into law.

"Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers," said the president.

Analysts said that the season of super profits for commercial banks in Kenya has come to a closure.

"With the capping of interest rates, banks will not continue making a killing as they have been doing at the expense of their customers," said Henry Wandera, an economics lecturer in Nairobi.

"This may not happen immediately as the law is not retrogressive, but moving forward, particularly in 2017, banks' earnings will certainly fall," said Wandera. Endit