NSE objects to introduction of loan interest caps

The Nairobi Securities Exchange (NSE) has opposed the introduction of limits on lending rates, saying that this will push down the value of listed banks.

NSE chief executive Geoffrey Odundo said in a press statement released late Thursday that capping interest rates had the potential to dampen the value of pension assets as listed banks are among the companies included in retirees’ portfolios.

“Capping of interest rates may negatively impact this sector with a knock-on effect of dampening broader stock market valuations. This, in turn, will have a social cost of eroding the sizes of retirement pots,” said Mr Odundo.

The NSE boss said that banks had indicated their willingness to self-regulate by coming up with a memorandum of understanding submitted to the regulator, the Central Bank of Kenya, with the intention to ensure they avoid usurious tendencies and commit to follow the signals set by the regulator to lower interest rates.

“We applaud the efforts of the banking sector in committing to enhance industry regulation and transmission of the Central Bank of Kenya monetary policy; promoting pricing transparency; and supporting enterprise development,” said Mr Odundo.

Legislators passed the Banking (Amendment) Bill, 2015 on July 27 limiting lending rates to four per cent above the Central Bank Rate (CBR) and to also set a minimum interest rate for deposits in interest-earning accounts at 70 per cent of the CBR.

The aim of this Amendment Bill is to lower interest rates.

"Less attractive to investors"

The NSE is concerned that the 11 listed banks could become less attractive to institutional investors, yet the lenders’ trading contribute more than 40 per cent in turnover on a daily basis.

“[The 11 banks] are an attractive asset to institutional investors such as pension funds which are able to generate sustainable incomes for pensioners off the banks’ consistent dividend payouts,” said Mr Odundo.

Banking stocks are also highly sought after by foreign investors.

“Foreign investors are drawn to the attractive valuations of our banking sector. Through the efficient and transparent capital markets, our nation is able to attract foreign flows that also serve to stabilise our exchange rate,” said the bourse’s CEO.

With the huge turnover in banking stocks, stock brokers are also major beneficiaries since their commissions are based on the value of the traded shares.