Two more banks lower interest rates to 14.5pc

August 30, 2016
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Barclays Bank of Kenya and KCB Group announced that they have reduced the interest rates applicable for all new loans to 14.5 percent/FILE
Barclays Bank of Kenya and KCB Group announced that they have reduced the interest rates applicable for all new loans to 14.5 percent/FILE

, NAIROBI, Kenya, Aug 30 – Two more banks have joined Co-operative Bank in lowering their interest rates in accordance with the new banking law assented by President Uhuru Kenyatta last week.

Barclays Bank of Kenya and KCB Group announced that they have reduced the interest rates applicable for all new loans to 14.5 percent.

Guidance on existing loans awaits direction from the Central Bank of Kenya once the law is gazetted.

BBK has however increased interest rates applicable on new Zidisha savings accounts and new term deposits to a minimum rate of 7.35 per cent.

The new law capping interest rates to not more than 4 percent above base rate set by the Central Bank of Kenya that is currently at 10.5 percent, could usher in fundamentals changes in the financial sector.

According to Cytonn Investments Chief Executive Edwin Dande banks that lend primarily to the SME and sub-prime segment will be the most affected because majority of their clients can’t fit into the 4.0 percent risk premium.

Banks that lend primarily to the prime individual and corporate commercial segments will be less affected because they have the most clients that can fit within the 4 percent risk premium.

“Banks with large retail bases such as Equity Group and Co-operative Bank were the worst affected, both losing 20.3 percent and 20.6 percent, respectively, while the least affected counters were for CfC Stanbic and Standard Chartered, both losing 6.3 percent and 7.8 percent, respectively.

It is quite clear that banks whose clientele are more inclined to retail and SME’s are bound to suffer more in this regime, given the high spreads they enjoy, and those that serve corporate clients will not be affected as much,” he added.

The effect of signing the law was felt immediately within the financial markets as banking sector stocks declined by 15.6 percent in two days of trading since the close of the market on Wednesday last week.

According to Dande, investors lost Sh88.9 billion in the same span of two days, highlighting the immediate negative impact of the decision on foreign sentiment towards the banking sector’s future.

“A number of banks informed their clients of their intentions to do away with savings accounts, leading to a reduced number of attractive banking products in Kenya and lending towards motor vehicles and providing unsecured loans was stopped by a number of banks,” he added.

He says going forward, banks are likely to introduce bank accounts with zero interest features to bypass the minimum interest payable.

“Banks may also resort to colluding so as to push up the yields on the Treasury instruments, and find other ways of maintaining their margins, most likely at the expense of everyday savers who will be forced to move to current accounts, which carry zero interest features,” he observed.

He also highlighted risk of job losses as banks cut jobs to maintain their cost base due to the lower margins, and lower standards of living in the economy as the lower access to credit leads to a decline in both consumption and investment expenditure.

“The intent of the Bill was not to attack banks profitability but to protect the consumer from exploitation through unreasonable interest rates. We are concerned that those whom this Bill was intended to protect may end up being the biggest losers, with non-interest earning accounts and reduced access to mainstream bank loans such as bank unsecured loans whose pricing has to be way above 14.5 percent,” he concluded.

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