Interest rates control existed up to the early 1990s, but were allowed to move on the basis of market sentiments as part of wider economic reforms.
It is evidence that banks can take some more risk – such as that represented by SMEs – without actually losing money.
The new law must be given time to run a full cycle in which banks will have restructured their operations to reflect the new normal.
The law capping lending rates and setting a floor for deposit rates has predictably caused a drop in commercial banks’ earnings, but it must be let to run its full cycle. The new law was put in place because commercial banks had for many years failed to regulate themselves in a manner that kept the price of money within the reach of most borrowers.
Interest rates control existed up to the early 1990s, but were allowed to move on the basis of market sentiments as part of wider economic reforms.
Soon the rates shot above the reach of most borrowers, prompting legislators to start attempts to control the cost of loans since the early 2000s until they finally succeeded in September 2015. Only 18 months have passed since the caps were enacted, hardly enough time to justify repealing of the law. Despite the capping of rates, the net profit for commercial banks fell by only Sh3 billion in the first quarter of this year as the total interest income – as was expected – fell by a total of Sh13 billion.
This is an indication that banks managed to use the non-funded business to offset most of the loss from the funded side by increasing fees and charges. The lenders have, however, cut back loans to the small and medium enterprises (SMEs), which are the engine of economic growth and job creation.
The financiers have instead been relying on lending to government and advances to big companies to grow their loan books, claiming they see the lower interest as failing to compensate for the risk they would take with lending to the SMEs. From the first quarter financial results, however, it is clear banks have not lost much in terms of overall profitability even as they keep off the SMEs.
It is evidence that banks can take some more risk – such as that represented by SMEs – without actually losing money. They can take comfort from the fact that there are many SMEs that are growing into big companies all the time. Indeed, many of yesterday’s SMEs are today’s large companies.
The new law must be given time to run a full cycle in which banks will have restructured their operations to reflect the new normal. Already there have been massive job cuts in the industry, which should take care of their operating costs going forward.
The government must not cave in to the pressure to undo the law that was done just a few months ago.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
