Huge bank profits spark fresh effort to curb cost of loans in Kenya

Equity Bank led the pack with a 94 per cent increase in interest income, followed by Co-op Bank with 84 per cent, Standard Chartered Bank (81 per cent), KCB (74 per cent) and Barclays at 17 per cent. The pattern was similar for other banks.

This happened even as the lenders reported only marginal growth in loan books as borrowers stayed away from taking new loans in the wake of a huge increase in interest rates.

“Performance was mainly driven by net interest margin expansion on the back of higher lending rates and increased allocation of assets to lending,” Standard Investment Bank said of StanChart’s performance.

“Earnings performance came in above expectation and was mainly driven by improved net interest margin,” the research note said, adding that the higher net interest margin in second quarter of 2012, was the result of a 0.75 per cent drop in weighted average interest rate on deposits on a quarter on quarter basis.

This drop in deposit rates has made interest margins – the difference between the rate at which banks are lending money and what they pay for the deposit – the latest target of the parliamentarians who are pushing for interest rate controls.

“We have previously tried to cap the lending rates, but this time we are looking at interest payable on savings with a view to fixing it as a fraction of interest paid on borrowings so that we can deal with the spread,” said Rangwe MP Martin Ogindo.

The MPs’ plan is to move an amendment to the Finance Bill that would leave the banks with a five to six per cent margin between lending and deposit rates.

Mr Midiwo, who is also the Gem MP, has also promised to introduce an amendment to the Finance Bill, seeking to regulate interest charged by all banks with government ownership to increase their influence in the market.

The method has been used with little success in the petroleum industry where government-owned National Oil has failed to become the pace-setter it was meant to be.

“We must encourage Kenyans to save and this can only happen with a reduction in the spread,” said former MP Joe Donde, famed for introducing the first Bill that sought to regulate lending rates in 2000.

The Kenya Bankers Association (KBA), however, dismissed claims of excessive profiteering from high interest rates.

Habil Olaka, the chief executive of the bankers’ lobby, said the sector is being demonised by those looking at the absolute figures without considering the large amount of capital investors have put in the businesses to get the results.

“I don’t see anything outrageous with these results as other companies have announced similar profit growth in the period,” said Mr Olaka.

Kenya’s top five lenders posted double digit net profit growth led by KCB at Sh6.08 billion, Equity’s Sh5.4 billion, Standard Chartered Sh4.53 billion, Barclays Sh4.26 billion and Co-operative Bank Sh4.02 billion.

Returns from short term government securities also helped improve the banks’ per performance. Banks have before argued that customer deposits are not their only source of funds – pointing to the fact that they often have to use expensive sources such as borrowing from other banks.