Last week, the High Court struck out the rate cap law on the grounds it is unconstitutional, giving the National Assembly 12 months to review it. Banks have for long lobbied for the removal of the cap, hence the ruling is seen as a big win for them.
They still have work to do though to win over a sceptical public on the interest rate debate, and to show that the days of usury are behind them.
The Business Daily spoke to KCB Group #ticker:KCB chief executive officer Joshua Oigara, who is also the chairman of the Kenya Bankers Association governing council, on the emerging issues in the sector following the ruling.
THE HIGH COURT RULING ON THE RATE CAP LAW HAS SET THE STAGE FOR ITS REVIEW. WHAT IS YOUR VIEW ON THE IMPLICATIONS FOR BANKS AND THEIR CUSTOMERS ONCE IT IS DONE?
The ruling is welcome for us. There is, however, still a lot of work that we need to do as banks. The 12-month window given by the court allows us time to go back and deal with the issues that were not very clear in the rate cap law, for instance the determination of the ceiling.
As the Kenya Bankers Association we have in the past year engaged Parliament and will continue to do so, the same with the Central Bank of Kenya, the Treasury and the public. We are saying that it is important to reduce the price of loans for SMEs, and to do so we need a better credit scoring model, that is a risk-based pricing model so that a good customer with a better record can get cheaper credit and vice versa.
We believe that natural pricing of credit will come down, so we are not anticipating that we would go back to high credit pricing for the public. From the first day, banks have always said that we should address the real reason why the price of credit remains high, and that is what we want to continue to do.
Even without the rate cap I think credit would on average still be in the 13 to 15 percent range. The macroeconomic situation right now where we have stable currency, inflation and treasuries yields are low does not call for banks to go and raise interest rates.
WHAT IS THE REMEDY TO THIS PROBLEM OF LACK OF CREDIT FOR SMALL BUSINESSES?
Last year, looking at the industry as a whole, lending to SMEs was down by almost Sh250 billion. That’s a lot of money. Unfortunately, banks have not been providing credit for a majority of customers, and that is why as KCB we have been pushing for a model that is heavy on mobile lending, while still working within the rate cap.
We have been scoring the borrowers on the platform and giving them different credit limits, some up to Sh100,000.
Last year, we lent up to Sh60 billion on the mobile platform, but we do recognise that SMEs need long-term finance, so we are working on a model that will provide this.
Before the cap, we were lending 30 percent to SMEs, today it has come down to 10 percent. That is where the focus is now.
BANKS HAVE BEEN SEEN IN SOME QUARTERS AS GREEDY AND REAPING EXCESS RETURNS AT THE EXPENSE OF CUSTOMERS. HOW CAN THE INDUSTRY JUSTIFY ITS BIG PROFITS?
We have largely been misunderstood. When an economy builds up savings and deposits of funds, a majority are deposited in financial institutions.
Today, we have about Sh3 trillion in deposits. Because of the size of these deposits and our loan books, even if we make a return of just 10 percent, we will make hundreds of billions.
If you look at the biggest listed firms, after Safaricom and EABL you will find a majority are banks. What we have not done well as an industry is to explain ourselves in terms of how and why we make money.
For instance, at KCB we have assets of over Sh750 billion. There is no other industry with such assets outside of pension funds, and that is why we make sizeable profits. We are also investing a lot in technology, so it has also helped increase transaction fees or non-funded income. The reality is that the economy needs strong banks to finance growth. You do not want to have loss-making banks.
WHERE ARE YOU IN TERMS OF IMPROVING CREDIT SCORING OF CUSTOMERS?
Today we largely use credit scoring to deny people credit, yet we also have a lot of positive information that we can also use to do positive credit scoring.
The CBK has now issued a banking charter effective by end of May, which will make it mandatory for banks to make loan pricing based on a customer’s credit score. It addresses the issue of transparency of pricing through a risk-based pricing model for customers. If you are a good customer now you can ask for a better loan rate. The problem is that most customers do not know their credit score.
We are changing from the model of lumping customers together on one price.
YOU HAVE RECENTLY SIGNED A PARTNERSHIP AGREEMENT WITH MOROCCAN LENDER ATTIJARIWAFA BANK GROUP. WHAT HAS INFORMED THIS MOVE?
Attijariwafa Bank Group is among the top 10 largest lenders on the continent. They operate mainly in north and west of Africa. What we are looking for is trade finance partnership, to enable our business customers to build outwards and access new markets. It is the first time a northern African bank is connecting to an East African peer.
The largest financial institutions in Africa are to be found in South Africa, Nigeria, Egypt, Morocco and Kenya, hence the need to work together.
HOW ARE YOUR SUBSIDIARIES SHAPING UP IN 2019, ESPECIALLY SOUTH SUDAN?
2018 was a good year for the international business units. While we grew our earnings as a group at 22 percent, the international (regional) business grew by 65 percent. We are investing more in these units, adding capital and improving use of technology.
We have seen improvement in South Sudan, where inflation came down to 40 percent last year from the highs of 300 percent previously.