Micro, small and medium enterprises were the biggest casualties of the introduction of laws capping interest rates, with most banks now shying away from lending to this perceived risky sector.
According to a new credit survey report released by the Central Bank, more than half of Kenya’s banks are no longer comfortable advancing loans to SMEs. The report showed that 54 per cent of the 42 financial institutions reduced their lending to the MSMEs in the period under review.
“Interest rate capping has compelled banks to increase their risk mitigation measures. As a result, this has locked out potential customers below certain risk thresholds on existing products standards,” the report reads in part.
On the other hand, salaried individuals continued being attractive to banks with most of them giving out more personal and trade loans signalling their confidence with the two borrowers.
For the period, the report showed that demand for credit increased by 49 per cent in trade and 44 per cent in personal /household economic sectors. The respondents attributed this increase in demand for credit in the two sectors to reduced cost of borrowing as a result of interest capping.
It also showed that only 10 per cent of the financial institutions increased credit issuance as a result of the interest rate capping which came into effect on September 14, 2016.
The survey indicated that 98 per cent of the financial institutions held their interest rates constant, with only 2 per cent decreasing their interest rates.
“This depicts a situation of mixed reactions as commercial banks take a wait-and-see approach on how the market will react to the capping of interest rates,” states the report.
Of the 42 institutions, 50 per cent indicated that demand for credit remained unchanged while 15 percent noted that demand for credit decreased due to the introduction of the interest rates.
Moving forward, in the third quarter of 2017, 75 per cent of the banks anticipate that the interest rate capping will have little impact on actual credit advanced due to the slow economy and the heightened political risks.
As at June 30, the demand for credit decreased by 68 per cent due to political risks. This was the highest effect on decreasing demand for credit among the surveyed 42 financial institutions.
Second among the factors affecting the demand for credit is loans from other banks and loans from non-banks at 31 per cent and 23 per cent respectively.
Other factors listed were, retention of CBR, issuance of equity, issuance of debt securities, internal financing, available investment opportunities, and cost of borrowing, which were cited as having had the least influence on the demand for credit during the quarter under review.
Even as banks credit standards in all the eleven economic sectors remained unchanged in the second quarter of 2017, political risks saw 55 per cent of the financial institutions tighten their standards, hence discouraging credit uptake.
The report said 14 per cent and 4 per cent of them tightened their standards in the transport, communication and agriculture sectors respectively.
This was due to a slowdown in economic activity and the prolonged drought being experienced in the country.
Mining and quarrying, tourism, energy and water and financial services sectors indicated the unchanged demand for credit