Are Kenyan banks still true to their traditional role of allocating financial resources to the most productive segments of the economy?
This is the question in the minds of many observers following recent reports that their decision to cut credit flow to companies struggling with cash-flow challenges is pushing many over the cliff into forced management or total collapse.
Cement maker ARM, Nakumatt Holdings and Mumias Sugar have been cited as examples of companies that have been starved of credit to near collapse. This has especially happened since the September 2016 introduction of caps on interest rates banks can charge borrowers. Well, the banks may argue – and rightly so – that they are in the business of responsible lending and cannot risk lending to entities that are not financially sound.
Yet the facts are there for everyone to see that these same banks lent tonnes of cash to these same businesses in conditions that are not very different from the current. The difference being in the mere fact that they were able to charge must higher interest rates – justified as risk pricing. That is exactly where the conundrum lies.
That a bank would rather lend to a wobbly entity in distress at exorbitant costs but will not touch the same at only moderate cost of credit – even if to save the business from collapse. The fact that banks are readily lending to the government billions of shillings mostly for consumption is the clearest evidence that most have put security of their money over enterprise development. This situation does not augur well for the economy because it kills enterprises that play a big role in job creation and payment of taxes that help run the government.
That banks can single-mindedly stick to this mode of operation while it is obvious that lending to these businesses to keep them alive would bear more fruit to the economy is puzzling. It would be foolhardy for lenders to starve corporates of credit and force them out of operation yet they themselves depend on borrowers to stay in business. Ultimately, what is happening here is market chaos brought about by regulatory and policy confusion that must be tackled from that level.
There is need for a fresh hard look into the credit woes vis-à-vis a rate cap law that has left banks engrossed on charging almost all their customers the maximum allowable rate in order to hedge against loan losses. Borrowers must also refine their operations to limit own risk profile. Lenders look out for basic factors such as state of corporate governance and business plans that offer them insight into a company’s ability to honour its future obligations.
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