Shares of Kenya’s biggest banks plunged after President Uhuru Kenyatta signed a law that caps the interest rates lenders can charge on loans.
KCB Group, the largest bank by assets, led the slump to head for the biggest decline in 13 years after Kenyatta approved legislation capping rates and minimum interest payments on deposits, saying he sympathised with Kenyans frustrated by the cost of credit and poor savings rates.
Cooperative Bank plummeted the most on record, while Equity Group, the market leader in terms of value, fell to the lowest in 16 months.
“Bank margins are going to thin out,” said Faith Atiti, an economist at Commercial Bank of Africa. “It is uncharted territory for most banks, especially those struggling with high nonperforming loans and with a huge retail exposure.”
Kenyatta announced after the stock market had closed on Wednesday that he had assented to amendments to the Banking Act, requiring that lenders peg credit costs at 400 basis points above the benchmark central bank rate. The law also compels financial institutions to pay interest of a minimum of 70% of the so-called CBR on deposits.
Kenyan lenders extended loans at a weighted average rate of 18% in June, according to the most recent statistics from the central bank, compared with 15.7% a year earlier. In comparison, the central bank has cut the CBR by one percentage point to 10.5% in 2016. It also lowered the Kenya Bankers’ Reference Rate, or KBRR, by 97 basis points.
KCB Group dropped 9.9%, the most since August 2003, to 29.50 Kenyan shillings (29 US cents) at 11.20am in Nairobi, the lowest on a closing basis since December 2012.
I&M Holdings slid 9.8%, the most since December 2013, while Equity Group tumbled 9.7% to 32.50 shillings, the lowest since April 2014.
“Kenyan banks loan rates are too high,” said Jacques Nel, a senior economist at SA based NKC African Economics.
“It might not be the best way to do it, but the government was running out of options.
“The rate cap presents opportunities for consolidation, for smaller banks it’s definitely going to be bad. If they can’t charge higher rates anymore, it’s going to be tough for them to survive.”
Bloomberg