INTEREST RATES CAP

Banks should take risk, no money grew by sitting in accounts

Safaricom grew by lending to all their consumers, regardless of how rich or poor.

In Summary

• No bank ever fell due to defaults by the SME sector. 

• Refusing to lend to informal sector in the name of playing it safe helping banks lose profit. 

Safaricom house
RISK TAKER, PROFIT MAKER: Safaricom house
Image: FILE

The fat profit Safaricom made cemented it as the most profitable company in East and central Africa, at a time when the economic situation of the country is a bit rough. 

It is M-Pesa that seems to drive the Telco’s fortunes and banks are scratching their heads trying to decrypt this phenomenon. Banks need to play their part or the money train will leave without them. 

Since the capping of interest rates in 2016, banks have refused to lend to the private sector citing risk, hence contributing to the credit squeeze in the economy. But they have no valid reason except that they won’t make as much profit as they used to whey they were free to charge exorbitant rates.

 

That excuse is not only lame but also self-defeating. We have credit reference bureaus, integrated populations systems, (including the ongoing Huduma Namba), and other laws to protect the lenders. We have the technology to make lending cheaper and thus make a profit even with interest caps.

The law on collateral has been revamped. Suppliers now have legal backing to ensure they are paid on time.  By concentrating on gov’t securities and formal employees, the banks are playing it safe but missing the point.

The recent KNBS report points out that 80 per cent are employed in the informal sector. So the banks are concentrating on a small piece of the cake. The real growth is happening out there.

If you have money, lend. Lend long term and finance people’s dreams. Banks are in the business of money. Extend the grace period and repayment terms. Equity Bank grew because it believed in and lent to the farmer, the mechanic and the hawker. Even the unemployed. And for the record, no bank in Kenya has fallen due to defaults by the SME sector.