Interest Rate Caps Effects: Most lenders increase exposure to the risk-free government securities as opposed to other risky borrowers
Kenya is one of the countries forecast to be among the fastest-growing economies globally in 2017. The country forms part of the East African Community, a regional grouping of countries whose economies are forecast to grow significantly faster than the Sub-Saharan Africa average. Firms with operations in the East Africa region benefit from regional integration, a growing middle class, and growth supported by investments in the build-out of infrastructure.
Of the 8 listed banks that have released their FY’2016 results, Co-op Bank, Standard Chartered and Diamond Trust Bank have recorded an increase in core earnings per share, with the average increase in core earnings across the banking sector at 6.1 percent. This is an increase compared to the 3.8 percent registered for FY’2015. The sector has however experienced lower loan and deposit growth, with the only metric that banks have been able to protect so far being their Net Interest Margins.
Key to note also is that half of the banks, namely KCB Group, NIC Bank, Equity Group, Stanbic bank and DTB have increased their exposure to government securities. This could be attributed to the change in loan and deposits pricing framework brought about by the interest rate caps that has made most lenders increase exposure to the risk-free government securities as opposed to other risky borrowers.
Interest rates cap was meant to improve lending to the consumer, but so far the cap has curtailed lending and it is time to review them. The remarks by President Kenyatta last week that the government intends to rectify the decline in private sector credit growth, as a result of reduced lending by banks, signals the intention to review the rates cap law in some way.
Of the 4 insurance companies that have released their FY’2016 results, CIC and Liberty have registered a decrease in core EPS of 83.3 percent and 12.4 percent, respectively, with the average decrease in core earnings per share across the insurance sector at 2 percent. This is however less than the 18 percent decrease in core earnings per share seen in 2015. The loss ratio has improved to 39.3 percent from 53.8 percent while the combined ratio has also improved to 84.2 percent from 101 percent.