Interest on risky loans forecast at 16pc after cap removal

High-risk borrowers like individuals and small businesses face an increase in loan rates of up to three percentage points following the removal of the legal cap on commercial lending charges, according to KCB  chief executive Joshua Oigara.

Mr Oigara, the head of Kenya’s largest bank by asset size— Wednesday said removal of the cap will ease lending to the small businesses, but forecast that their interest rate will increase to between 15 percent and 16 percent, up from the current 13 percent.

President Uhuru Kenyatta’s bid to remove a cap on commercial lending rates was passed in Parliament on Tuesday following a quorum hitch, potentially boosting the flow of credit to the economy and return of expensive credit.

Mr Oigara reckons that lending rates are unlikely to breach the 20 percent interest rate level—which prevailed ahead of introduction of rate caps in September 2016.

“Banks are ready to lend. So we are going to see more people including SMEs start accessing credit in the industry. Customers with high-risk profiles may see a 2-3% increase,” Mr Oigara said in a statement yesterday.

High-risk borrowers like individuals and small businesses face an increase in loan rates of up to three percentage points following the removal of the legal cap on commercial lending charges, according to KCB  chief executive Joshua Oigara.

Mr Oigara, the head of Kenya’s largest bank by asset size— Wednesday said removal of the cap will ease lending to the small businesses, but forecast that their interest rate will increase to between 15 percent and 16 percent, up from the current 13 percent.

President Uhuru Kenyatta’s bid to remove a cap on commercial lending rates was passed in Parliament on Tuesday following a quorum hitch, potentially boosting the flow of credit to the economy and return of expensive credit.

Mr Oigara reckons that lending rates are unlikely to breach the 20 percent interest rate level—which prevailed ahead of introduction of rate caps in September 2016.

“Banks are ready to lend. So we are going to see more people including SMEs start accessing credit in the industry. Customers with high-risk profiles may see a 2-3% increase,” Mr Oigara said in a statement yesterday.

“We are not going to see a massive change. As a leader in the industry, we don’t see an opportunity to go back to the old behaviour of high rates,” he added.

There were only 161 lawmakers present at the time of voting on the President’s amendments for removal of the caps, which fell below the threshold of 233 lawmakers required to retain the cap on lending rates.

The removal of the cap has stoked fears that banks could return the lending rates that prevailed ahead of introduction of the law that restricted bank loan charges.

“The regime of the 20 percent interest rate is long gone. The macroeconomic and business environment where we are today does not at all support an environment of high rates,” said Mr Oigara, who is also the Chairman of the Kenya Bankers Association—the lenders’ lobby.

In the amendments to the rate cap legislation, legislators shielded existing loans from higher interest rates once the cap is repealed, meaning that only new loans will be affected by the high interest rates set to follow.

The removal of the caps continued to back the rally in banking stocks at the Nairobi Securities Exchange (NSE), which have surged since October 17 when news of the possible removal of the cap leaked.

All the 10 banks listed on the Nairobi bourse gained on what stock dealers linked to increased demand for the lenders’ shares on the expectation of increased profitability and stock gains.

The wealth of investors holding bank stocks jumped by Sh25 billion yesterday to hit Sh777.3 billion, up from Sh641.44 billion on October 17. This means that banking shares have gained Sh133 billion in the period.

The shilling also appreciated on Wednesday on account of increased dollar inflows by foreign portfolio investors eyeing a piece of the banking stocks pie.

In afternoon trading, commercial banks quoted the currency at an average of 103.05 to the dollar in the interbank market, compared to Tuesday’s closing average of 103.19 units.