BANKING

Lenders reap big in 2019 with borrowers expected to pay more to access loans

In Summary

•Most banks have had a field day this year, leveraging on lending to government and disbursing digital loans

•Experts project bank profits will surge going forward after the rate cap law was scrapped, allowing lenders to return to free float interests rates

Customers queue inside a KCB branch in Nairobi.
Customers queue inside a KCB branch in Nairobi.

Most commercial banks were swimming in profits throughout the year despite it being a tough business environment for most other sectors.

Majority of lenders capitalized on investing in government securities in 2019 to keep profits up and in turn appeal to investors while ultimately shunning borrowing to private businesses who were termed as risky.

Banks closed the third quarter of the year on a high with tier 1 banks reporting improved net profits in their Q3 results.

KCB Group reported the highest post-tax profit of Sh19.2 billion during the nine months to September. The bank pegged its success on continued growth in its international operations as well as growing activity in its digital offerings.

The lender beat competitors Equity Group, which registered a 10 per cent growth in profit after tax to Sh17.46 billion followed by Co-op Bank with profit recorded at Sh10.9 billion.

Most banks have had a field day this year, leveraging on lending to government and disbursing digital loans to grow their non-funded income at the expense of loans to small businesses and individuals.

Equity Group’s investment in government securities grew by five per cent, which according to the lender was a slow down compared to the same period last year.

On the other hand, KCB’s share of government securities grew 2.29 per cent to Sh103 billion.

Co-op bank grew its investment in government securities at the highest rate of 13.7 per cent to Sh94.6 billion compared to Sh83.2 billion in first three quarters of 2018.

“The faster growth in total income above net interest income reflects the success of the strategic pursuit of the Group to grow quality income through non-funded income growth,” Equity Group CEO James Mwangi said during an investor briefing.

 

THE SHORT RATE-CAP STINT

Last month the law capping interest rates was overhauled after Members of Parliament failed to meet the quota needed to retain the law.

President Uhuru Kenyatta had refused to assent to the Finance Bill, stating that the ceiling on commercial loan rates stifled borrowing by SMEs arguing the entities were crowded by government’s appetite for borrowing from commercial banks.

This brought to an end a three-year regime imposing four per cent interest above the Central Bank Rate.

Although KBA chairman Joshua Oigara said interest rates would go up to 16 per cent once the law was overhauled, a number of borrowers who have already tried to access credit facilities say banks are charging up to 17 per cent interest on commercial loans.

Experts project bank profits will surge going forward after the rate cap law was scrapped, allowing lenders to return to free float interests rates.

A banking analyst Dave Kekoyo told the Star that scrapping of the law will now see banks reverse their fundraising mechanism from government securities to loans, earning higher returns over a short period while supporting capital flow in the economy.

For private sector credit growth to have a significant contribution to the country’s economy, it needs to be more than 15 per cent.

As per the most recent Monetary Policy Committee meeting, private sector credit growth stood at 6.6 per cent in the 12 months to October a drop from 7.0 per cent in September.

Private sector credit growth has been sluggish since the government capped commercial lending rates as lenders turned to Treasury bills and bonds to boost performance.

In an interview with the Star, CBK governor Njoroge said “the cure earlier offered (the rate cap law) was worse than the disease.”

The rate cap law also saw mid and low level banks trade off profitability for liquidity in a policy-tight market, leading to consolidation and acquisitions.

Njoroge said he was satisfied with receivership of collapsed lenders including Imperial Bank and Chase Bank as well as the acquisition of National Bank but remained concerned with the slow pace of the Charterhouse wind-up.

“Done well? Yes but we can’t rest our laurels and must feel the urgency to accelerate,” he said.