News Analysis: Kenyan law to cap interest rates may slow loan growth

Kenya's commercial banks said Thursday they will comply with the new law which seeks to cap interest rates charged on loans and deposits.

The Kenya Bankers Association (KBA) CEO, Habil Olaka, however said the bank interest rate capping law will reduce the rate of growth of loans.

"We however do not feel that a rate cap is in the best interests of the majority of people and businesses that this law seeks to support," Olaka told journalists in Nairobi.

The Banking Amendment Bill 2015 which was signed into law by President Uhuru Kenyatta on Wednesday, effectively limits the interest rates charged by banks to no more than four percentage points above the Central Bank Rate (CBR).

With the CBR interest rate currently standing at 10.5 percent, banks cannot charge higher than 14.5 percent as interest on credit.

The bill intends to regulate interest rates that are applicable to banks' loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits.

"We expect that once the Banking Amendment Act 2015 is operational, the rate of expansion of credit will reduce as banks will avoid lending to risky clients," Olaka said.

He said banks were awaiting rules from the authorities to establish whether those already with loans will be affected by the new interest cap law. In the interim, he said, all existing loan and deposit account, interest rates will continue to apply.

Analysts say the process of gazetting the law and developing regulations is likely to take about one month.

"Current loans will now stay as they are, we are waiting for the law to be gazetted, the government has not yet issued details of how the law will be implemented," Olaka said.

He said that interest rate capping will mean that clients who are deemed to be too risky will be locked out of accessing loans from formal financial institutes.

"High risk borrowers will now face more obstacles in getting loans. If your risk is higher than the 4 percent cap that is now in the law, it will be hard for a bank to give you a loan, most small and micro finance companies fall in this category and they are the backbone of the economy," Olaka said.

He said that going forward, banks will not enter into loan contract that charge interest rates above what is prescribed by law.

"Lending decisions will still be based on risk appetite and so banks are likely to concentrate on lending to large firms that are perceived to carry less risk of defaulting," he said.

According to KBA, the interest rate capping law will reduce revenue of the banks, which means the financial institutions will now have to develop new business models in order to maintain profitability.

"Banks will be forced to reduce reliance on interest income as well as leverage on technology in order to reduce costs," the CEO said.

Kenyan banks have set aside 300 million U.S. dollars worth of loans to be extended to small and medium enterprises (SMEs) at preferential rates.

One million dollars of the amount will be used for capacity building for the SMEs to enable them to reduce their defaulting risks so that they qualify for loans at lower interest rates. Endit