The possibility of credit rationing expected in the conventional banking sector following the implementation of the law capping interest rates will favour micro finance lenders, an industry executive has said.
Maisha
Micro Finance Bank CEO Ireneus Gichana said the new law presents a major growth opportunity for micro lenders since expected credit cuts will push borrowers to flock micro financiers.
“Microfinance banks now need to position themselves to go when banks begin the credit rationing,” he said.
The new law, which caps rates at four percentage points above the Central Bank Rate, has pushed down interest rates to a maximum of 14 per cent whereas average lending rate among microfinance banks is around 20 per cent.
He said the argument that the law will be counterproductive due to the credit rationing is faulty because borrowers have other options such as micro finance banks.
Maisha Micro Finance Bank was licensed by the Central Bank of Kenya in July, and it plans to focus on building small and medium-sized enterprises.
“Since our launch, we have over 400 customers with a plan to hit the 50,000 mark by end year. During our research, one thing came clear, small and medium enterprises lack enough capital, they need short-term loans to finance their businesses,” Gichana said.
The new banking law has been termed as harmful to the economy as it will lock out risky borrowers and lower growth of banks. Banks whose main goal is to sell money have recorded high profits leading to accusations of profiteering since Kenya has the highest interest rate spread in Africa.
This is, however, expected to change as the new law takes effect.
Central Bank of Kenya governor Patrick Njoroge said Kenyan banks have been enjoying interest rate spreads of about 11.4 per cent on average, way above the world average of 6.6 per cent. Moreover, their return on earnings averaged 30 per cent, while in Europe it is at seven per cent, and about 15 per cent in South Africa.