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Banks see little 2019 earnings boost from repeal of rate caps

Central Bank of Kenya
The Central Bank of Kenya building in Nairobi. FILE PHOTO | NMG 

Banks expect the removal of lending rate controls to have a minor impact on their earnings for the full year ending this month, noting that they were stopped from re-pricing existing loans.

Scrapping of the rate caps became effective on November 7, 2019 after the Finance Act 2019 repealed Section 33B of the Banking Act.

The changes included provisions to maintain or lower the interest rate on loans already issued. This means that lenders can only charge higher rates on new loans or when existing credit facilities mature and need to be refinanced.

“We are pleased that the interest rate caps in Kenya have been removed, this change will only be applied prospectively and therefore the impact in 2019 is expected to be negligible,” Arno Daehnke, the finance director of South Africa’s Standard Bank (which owns Stanbic Holdings) said in a conference call last week. The government had since 2016 limited the rates that banks can charge customers to four percentage points above the Central Bank Rate.

This saw the maximum lending rate stand at 13 percent by the time the lending controls were removed, with lenders expecting the process of re-pricing most of the riskier loans upwards to take a few years.

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While the law change gives banks freedom to set rates on new loans, they will do so under the watch of the Central Bank of Kenya which is keen on curbing a sharp rise in lending rates.

The regulator has asked banks to continue reporting data on their old and new loans to afford a comparison of the changes in their loan pricing.

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