Rate cap raises demand for loans, but Kenyan banks tighten purses

Interest rate capping in Kenya has led to increased demand for credit, particularly from small businesses, but few are being granted loans by commercial banks, Central Bank of Kenya's (CBK) credit survey showed on Monday.

The apex bank conducted the analysis in some 40 commercial banks, where 60 percent of the respondents noted that demand for credit has risen since September when the law to cap lending charges at 4 percent above CBK rate (now at 10 percent) came into effect.

"Some 46 percent of the respondents, however, indicated interest rate capping had little effect on the actual new credit granted, 37 percent felt that actual new credit increased while 17 percent felt that the actual credit decreased," said the regulator in the third quarter survey.

"This depicts a situation of mixed reactions as the commercial banks take the wait-and-see approach on how the capping of interest rates will impact the market," the bank added.

Recent data from the Treasury shows that credit to the private sector grew by 4.8 percent in September, the slowest pace since June 2008, the year that the economy grew just 0.2 percent.

During the period, domestic credit slowed to an annual growth of 657 million U.S. dollars in the year to September compared to a growth of 5.3 billion dollars in September 2015, according to Treasury.

The banks, noted analysts, are becoming increasingly reluctant to lend to households, hotels and companies, among other private entities, since the enactment of the law in August. However, they are lending the government.

But it is not all gloom, commercial banks expect that in the fourth quarter, Non-Performing Loans (NPL) that currently stand at 2.1 billion dollars would go down due to positive impact of the rate capping law.

"Some 51 percent of the respondents expect that the capping of interest rates will have a positive impact on NPLs, 6 percent felt that NPLs will deteriorate while 43 percent felt that the bad loans will not change."

Going forward, however, the Central Bank is optimistic that there would be growth in credit after banks overcome the impact of the law.

"With regards to demand for new credit in quarter four, interest rate capping will result to an increase in actual new credit granted as indicated by 63 percent of the respondents. Some 26 percent of the respondents felt that the demand will remain unchanged while 11 percent felt that the demand will decrease," said the CBK. Endit