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Rate capping not to blame for depressed private sector borrowing, analysts say

Kenya Bankers Association Chief Executive Habil Olaka. Bankers say the downward trend of credit to the private sector is showing signs of being exacerbated by the capping of interest rates/FILE

NAIROBI, Kenya, Mar 24 – Financial analysts have downplayed the impact of the interest rate capping law on the decline of credit to the private sector in 2016 as well as the decline in profits. 

Cytonn Investments analysts says that while it is expected that private sector credit growth will stabilize at low levels, it is yet to be attributed to the interest rate caps, bearing in mind private sector credit growth had slumped for the 13th consecutive month, to 5.4 percent in August 2016, before the Banking Amendment Act came into effect.

The analysts attribute the slowdown in credit to structural factors in the banking sector as opposed to monetary policy.

According to statistics from the Kenya Bankers Association, private sector credit growth slowed down from 17 percent to 5 percent between January 2016 and August 2016.

The interest rates cap came into effect in August 2016 where banks were forced to only add a flat interest of 4 percent over the Central Bank’s rate.

Between August 2016 and December 2016 private sector credit growth stabilized at 4 percent.

However, Bankers have insisted that the new rate cap has negatively affected their business and are urgently calling for its removal.

“Even though credit growth to the private sector was to stabilize at the current lower level evidence of credit reallocation is emerging and it is to the disadvantage of households and sector amenable to SMEs,” KBA says in their status report on the impact of Interest Rates cap.

In the last two weeks, eight banks have released their 2016 full year results, with half of them registering a drop or flattening of profits, while others posting a rise in profits.

Central Bank of Kenya Governor Patrick Njoroge has been on record urging banks to review their business models for them to remain profitable.

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Cytonn analysts are also of the view that the Monetary Policy Committee (MPC) will retain the Central Bank’s lending rate at 10.0 percent despite inflationary pressures.

In their previous meeting, held in January 2017, the MPC maintained the CBR at 10.0 percent citing robust economic growth in the third quarter of 2016 and the stability of the currency supported by a narrowing current account deficit, from 6.8 percent of GDP in 2015, to an estimated 5.5 percent in 2016.

However, the MPC noted that the available data at the time was inadequate to make a conclusion as to the impact of the Banking Act on the banking sector and the economy in general.

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