Roundup: Kenyan banks defy rate capping to grow loan books, interest income

NAIROBI, May 28 (Xinhua) -- Kenyan banks have adjusted to the new operating environment brought about by the introduction of interest rate caps even as the central bank works to remove the law.

The banks' quarter one results point to the fact that the financial institutions have overcome the storm raised by the law effected in September 2016, with their interest income and loan sizes rising during the period.

The law capped interest rates at 4 percent above the Central Bank of Kenya (CBK) benchmark indicator, which currently stands at 9.5 percent.

Banks have, therefore, been charging customers interest charges of between 13.5 percent and 14 percent, when the CBK rate stood at 10 percent, since the law came into effect.

This is incomparable to between 18 percent and 27 percent that the financial institutions were charging before the law took effect.

Six listed financial institutions, namely, Stanbic Bank, Equity Bank, Kenya Commercial Bank, Cooperative Bank, Diamond Trust Bank and NIC Bank have so far released their quarter one results.

An analysis of the banks' results indicated that they recorded an increase in core earnings per share, with the average increase coming in at 17.6 percent compared to a decrease of 8.6 percent in the same period in 2017.

This growth was mainly driven by an increase in the loan book and net interest income, which came in at 9.5 percent compared to a decrease of 10.1 percent last year.

For Diamond Trust Bank (DTB), interest income increased by 4.9 percent to 86 million U.S. dollars from 82 million dollars in quarter one in 2017.

On the other hand, for Cooperative Bank, general interest income rose by 9.1 percent to 104 million dollars from 92 million dollars in the first three months of the year.

Specifically, the bank recorded interest income on loans and advances of 84 million dollars from 77 million dollars in the same period in 2017.

This is an indication that the financial institutions lend out more money during the period, which helped raise interest on loans.

Similarly, interest expense rose, an indication that the banks opened more interest-earning accounts, which a majority had done away with following the law.

For DTB, interest expense on customer deposits rose to 33 million dollars from 32 million dollars while Cooperative Bank registered an increase in the interest expense on customer deposits to 27 million dollars from 25 million dollars.

"Interest expense paid on deposits recorded a faster growth of 11 percent for the six banks on average, indicating that more interest earning accounts have been opened, which increased the cost of funds. This indicates that the banking industry has adjusted to the new operating environment," said Cytonn, a Nairobi-based investment firm.

The average loan growth stood at 4.3 percent for the banks, while investment in government securities rose by 27 percent, outpacing the loan growth, showing that even as the institutions move to loan more to private sector, their lending is still tilted towards government considered as risk-free.

The central bank is currently setting the stage for the removal of interest rate caps with the institution's research showing the ceiling has impacted negatively on the economy.

The bank in readiness for the scrapping of the law announced recently that it carried out a study and found the caps have done more bad than good to the income.

"The interest rate caps infringe on the independence of the Central Bank and complicate the conduct of monetary policy. It is found that under the interest rate capping environment, monetary policy produces perverse outcomes," said the bank in a recent report.

The central bank noted that the law had made demand for credit increase but credit to the private sector had declined. The banks results, however, point to the contrary. Enditem