Relief for borrowers as KCB, CfC banks cut cost of old loans

Kenya’s biggest bank by assets KCB and CfC Stanbic Wednesday announced that they had lowered interest rates for existing borrowers in line with the new law capping the cost of loans, piling pressure on their peers to follow suit.

The decision marks a departure from the industry lobby Kenya Bankers Association’s (KBA) earlier position that existing loans would continue to be serviced at pre-interest rate cap levels averaging 18 per cent till the Central Bank of Kenya issues guidelines on the new law.

KCB had previously announced that it was capping interest rates on new loans at 14.5 per cent in compliance with the law before changing the position yesterday shortly after CFC Stanbic included existing borrowers in its announcement.

“It will be applicable to both existing as well as new borrowers. Our understanding is that the pain felt is now not a future pain,” said CfC Stanbic’s chief executive Philip Odera.

The new law — which is yet to be gazetted — caps lending rates at four percentage points above the Central Bank Rate, which currently stands at 10.5 per cent.

Co-operative Bank, which was the first to comply with the new law for new borrowers said it would wait for guidelines on whether the law covered existing loans.

KCB said the new interest rates would be applied to existing loans beginning today.

“This exercise of reviewing the current facilities will commence on  September 1, 2016 and we urge our customers to get in touch with their branch managers in case of any additional information as we re-price the terms of existing loans,” KCB chief executive Joshua Oigara said. KCB has more than 1.25 million loan accounts while CFC has 33,000.

Mortgage borrowers are expected to be the highest beneficiaries of the change given the larger size and long tenure of their loans.
Bank earnings are expected to take a hard hit from the immediate lowering of lending rates, especially small lenders who are likely to find challenges with deposit mobilisation.

READ: Banks likely to exploit flaws in new interest rates law

“We expect to see bank mergers, acquisitions and at worst, closures, especially with small banks and medium sized banks, which are already struggling to cope with a liquidity market that is skewed in favour of large banks,” said analysts at Standard Investment Bank.

Least affected

CfC Stanbic had been cited as one of the lenders least affected by the new interest rate regime given their huge corporate customer base that usually bargains for low lending rates and high returns for deposits.

“We estimate CfC Stanbic’s lending rates will decline the least due to its significant foreign currency denominated exposure and relatively competitive local currency lending rates,” said analysts at Exotix Partners.

CfC also said it will be rewarding its customers with savings accounts at 7.35 per cent in compliance with the new law that requires banks to pay a minimum of 70 per cent of the base rate for deposits.

Mr Odera said the bank is currently offering deposit rates of seven per cent to savings accounts indicating its cost of funds will not spike as is expected for other lenders.

KBA had earlier taken the position that the law capping interest rates was not clear on how current loans were to be treated making KCB and CfC Stanbic’s move significant.

“Banks are trying to be proactive given that the intention of the law was to benefit the existing customer even though the wording of it does not address that,” said the association’s chief executive Habil Olaka.

Share prices of listed banks on the Nairobi Securities Exchange plummeted last week following presidential assent of the law regulating interest rates as investors factored in possible drop in earnings.

Application of the new law on existing loans is further expected to dent interest income which is the main revenue line for banks.

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