The interest rate cap and the effects on the financial sector, specifically banks, has been a consistent feature in discussions about business and economics in Kenya this year. The main effects of the cap have been a notable contraction in liquidity particularly to small and medium-sized enterprises (SMEs).
Banks are of the view that the cap has limited their ability to build risk into loan pricing and thus prefer to lend to government and larger companies. However, there are ways through which the interest cap, perhaps inadvertently, helped banks given the turmoil it has created in the sector.
Firstly, the cap has forced the sector to become more efficient. To cut costs to, partly, manage the effects of the cap banks have put in several measures such as closing branches, reducing employee numbers and leveraging automation.
Technology has been aggressively brought on board via new features, such as PesaLink, that reduce the need for staff to receive and process payments.
Low performing branches seem to have been shut down and over 2,000 staff laid off. Perhaps the cap fast-tracked these efficiency measures since it was clear that automation, for example, had been part of long-term plans for the sector.
That said, the cap has forced banks to become leaner and more efficient entities to protect profit margins.
Secondly, the cap may well have started a conversation among bank management on the risk assessment tools. It is an open secret that banks in Kenya are risk averse and generally want security in the form of assets or a monthly pay cheque against which they issue credit.
Perhaps the cap has forced banks to rethink their risk-assessment tools to better delineate high versus low risk clients. It is time the banking sector created more sensitive tools that look beyond assets and monthly salaries to determine whether credit will be offered or not.
The reality is that there are relatively high-income Kenyans who would likely be safe bets but have ‘informal’ sources of income that tend to be immediately classified as high risk by banks.
It is time banks sophisticated their risk assessment tools to more clearly determine to whom they should lend. Hopefully the cap catalysed a conversation in this direction.
Finally, the cap has perhaps woken the sector up to the need to be seen as an ally of the Kenyan people.
One of the factors that informed the implementation of the cap was the widespread feeling among Kenyans that banks were greedy shylocks that deliberately over-priced loans with little concern for the onerous weight such pricing placed on Kenyans.
Indeed disgruntlement with the banking sector is what led to popular support for the cap in the first place. Thus, hopefully the cap has made the sector more fully appreciate the need to be an ally of the Kenyan people by pricing loans more reasonably in the future.