News Analysis: Kenyan banks trying hard to adapt to interest rate caps

A move to cap commercial banks' interest rates in Kenya has taken a toll on the financial institutions, forcing many of them to align their operations to the changed environment.

From laying off staff to merging and acquisitions, lending more to government, reducing number of working hours and aggressively taking services to mobile and online platforms, the Kenyan banking industry has rapidly changed in the last eight months when the law was introduced.

Kenya capped interest rates last September at 4 percent above the Central Bank rate, which currently stands at 10 percent in bid to deepen access to credit for citizens and business community.

Before the law, banks were charging between 18 and 30 percent for loans advanced to their customers reaping huge profit.

The banks have responded to the new interest rate regime in varied ways as they cry foul and push for repeal of the law.

At least 10 financial institutions out of the 42 that operate in Kenya have announced job cuts and closure of branches, with close to 2,000 workers being affected and 20 branches closed.

Equity Bank, Kenya's biggest bank by customer base, has so far send home 400 workers in the last months, according to industry data.

Standard Chartered Bank, on the other hand, sacked 300 workers in 2016 and last week, the bank announced that it had cut operating hours for most of its branches in Nairobi as it pushes its customers to online and mobile banking.

Besides, the bank early this year undertook a digitization process involving replacement of all its ATMs with advanced Cash Deposit Machines, an exercise expected to phase out tellers as the institution targets to migrate 80 percent of all its transactions to non-branch channels by 2018.

Kenya Commercial Bank, similarly, last year laid off 223 employees in Kenya and its subsidiaries across East Africa as it went restructuring.

Last week, however, the bank offered a voluntary employee buyout program worth 20 million U.S. dollars to its 500 out of 7,100 staff and further invested 25 million dollars in upgrading its technology infrastructure to reduce operational costs and improve clients' convenience.

Kenya has further witnessed a number of acquisitions in the sector, especially in the second half of 2016 and early this year, involving mainly smaller banks.

Giro Commercial Bank was acquired by I&M Holdings while Oriental Commercial Bank was acquisitioned by Bank M of Tanzania. More are still on the way.

Analysts noted that the full impact of interest rates caps is yet to be felt by the commercial banks and more changes are set to be witnessed as banks struggle to survive and protect their bottom lines.

"2017 being the year in which the full impact of the Banking (Amendment) Act, 2015 will be felt, we are likely to witness banks' push for efficiency gather pace to balance off the expected reduction in absolute profitability going forward as they shy away from physical branches model, which are very expensive compared to other alternative channels such as digital platforms," said Cytonn, a Nairobi-based investment firm.

The International Monetary Fund (IMF) is among leading institutions that have called on Kenya to do away with the law, noting it is not good for Kenya's economic growth.

The institution, after review on Kenya's performance, last week said interest cap have completed monetary policy and adversely affected credit access for small and micro-enterprises.

"Interest rates controls are undermining effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth," said IMF.

Credit to private sector growth fell to 4.3 percent in 2016 compared to more than 17 percent a year earlier, according to the Central Bank.

Supporters of the law, however, accuse IMF and commercial banks of working hard to sabotage the pro-people law.

"The law was not in the banks' interest, so they cannot support it. However, we expect the government not to repeal it anytime soon despite the pressure from banks and IMF, not until after August elections," said Henry Wandera, an economics lecturer in Nairobi,

"This law favors the masses and leaders may not want to appear as they do not share in plight of the people, who had suffered for years due to high interest rates," Wandera said, noting in the long-term, the law would be done away with. Endit