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September 25, 2018

Cut public debt appetite to spur credit to SMEs

Money is now cheaper, so people can buy more of it: Kenya Commercial Bank’s CEO was quoted in the media saying the bank’s personal loans had risen from Sh1 billion a month to more than Sh3billion. That’s just want the MPs had intended with the interest rate cap, no? It’s worth taking a closer look, though: As he also points out, most of the additional lending is top-ups of existing loans – with lower interest rate payments, clients can afford to borrow larger sums. For the bank, top-ups work because those are trusted clients already.

It’s quite likely that the sudden surge in personal loans won’t continue: KCB expect this trend to last until early 2017. Then everyone who could and wanted to borrow more will be sorted out. So what next? Banks look like they have fallen in line with the act relatively meekly. But nobody wants to be seen as a lawbreaker, and I guess they also realised how much everyone hated their fat-cat behaviour and wasn’t interested in hearing any more whining. Naturally they will seek ways to replace the income they have lost. And despite CBK warnings, there are signs that they have begun to do so – convert savings accounts into current accounts (no minimum interest there), introduced a few new fees and so on. If you can lend to government (in large volumes, practically risk free) at the same rate as you can to an individual (small amount, possibly considerable risk), what would you do? If the Kenyan government wants to make a proper go of this, it’d have to significantly reduce its local borrowing.

And I did wonder how serious the government was about this in the end. In the short term, Mr Kenyatta was obviously very serious about one aspect, the political benefits. The interest rate cap united MPs from all sides – only bills on MPs’ remuneration and tax exemptions get passed with the same warp speed and unanimity. Who wants to pick that battle right before an election if you can just take the good press, leave the banks to introspect and cut some fat – and then revisit the issue in a year’s time? I suspect this will happen. A number of issues in how the legislation was written would potentially open it up to a challenge, for example the lack of clarity what the reference rate is, the confusion between per cent and percentage points (which is really basic, and always irritates me when the papers get it wrong). In the meantime, size has really begun to matter, so could this also give a bit more momentum to banking sector consolidation?

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