The average size of loans issued by commercial banks and microfinance institutions nearly tripled from Sh235,000 to about Sh665,000 immediately after the rate capping law came into effect as lenders bombarded good borrowers with cash.
A new report by Creditinfo credit bureau attributes the rise to a clamour by customers to cash in on the low interest rates and a shift by banks from perceived high-risk to low-risk customers.
“Banks stopped giving lower ticket loans and then for the people who were borrowing, they started seeking top-ups or refinancing. Any new facility that was being given was focusing on high-value loans,” said Kamau Kunyiha, Creditinfo chief executive officer.
The Banking (Amendment) Act 2016 sponsored by Kiambu MP Jude Njomo came into force on September 14 introducing legal caps on interest rates.
The legislation sets the maximum lending rate at four percentage points above the Central Bank Rate (CBR).
It also sets the minimum returns payable by banks on customer deposits at 70 per cent of the CBR.
The CBR is currently at 10 per cent, meaning banks are barred from charging loan interest above 14 per cent.
Towards the end of quarter four though, the rush fizzled out as reflected in the Central Bank of Kenya data, which shows private sector credit growth fell to 4.3 per cent in December 2016 compared to more than 17 per cent a year earlier.
The study claims banks are subsequently increasingly keen on the services of credit bureaus as they seek to weed out higher risk businesses, especially those that have struggled to make repayment on historic loans.
This has resulted in a significant shift from personal loans to SME loans, it says.
“The value of average loans has increased considerably to reflect this. This may be a boost for commerce as SMEs now access credit to grow the business and expand,” said Mr Kunyiha.
Central Bank of Kenya (CBK) chairman Mohammed Nyaoga speaking at the venue urged banks to reward borrowers with more competitive credit histories.
“I would therefore urge the credit reference bureaus and the banks to work on adopting and embedding credit scores in credit risk pricing,” said Mr Nyaoga.