Experts rap seesawing regulations, say trend is scaring away investors

It is a day the banking industry never wanted to come. But on August 24, 2016, President Uhuru Kenyatta took away their free hand in pricing credit.

Once the law capping interest rates kicked in, layoffs, additional fees and commissions and roll-out of new products followed as banks sought to protect their margins, according to the Central Bank of Kenya (CBK).

“While the structure of revenue of the banks has started to shift away from interest income, some banks have exploited the existing approval limits to increase fees on loans in a bid to offset loss in interest income,” said CBK in a post-rate cap regime study released in March.

But before the sector settles in this new normal of controlled cost of credit, National Treasury is plotting the removal of this law and replace it with another raft of measures under Financial Markets Conduct Bill 2018.

The Bill wants to create four new entities to regulate access to credit: Financial Markets Conduct Authority, Financial Sector Ombudsman, Conduct Compensation Fund Board and Financial Services Tribunal.
Apparently, such a volatile environment in which regulations seem to be always changing, is affecting a number of the sectors. In these sectors, the government is in the process of either introducing additional regulations or reforming the existing ones. All, at a pace that is casting a cloud of uncertainty on investment decisions.

The Kenya Bankers Association (KBA) chief executive Habil Olaka, told Sunday Nation in a phone interview that such an environment of perpetual changes in regulations scares away investors, forcing them to delay decision-making in an unpredictable environment.

“An investor wants stability and ability to project so as to make better decisions on the basis of the information that he or she has synthesised. If there are too many uncertainties in the regulations, then it delays decision making or it might make investors make decisions in the negative,” he said.

He added that in cases where investors are comparing different tax regimes, they may easily settle for a market of high but stable taxation policy and other regulations as opposed to one with low tax but quickly changing regulations.

According to Barclays Bank of Kenya (BBK) head of strategy Moses Muthui, formerly a Wall Street investment banker, slippery regulations in the financial sector may encourage firms to capitalise on any available loophole in order to dodge what they perceive to be unfavourable rules of the game.

“As the industry grows, we are likely to see a cycle of overregulation. It may lead to regulation arbitrage like was seen in Europe leading to financial crisis,” he warned.

If passed into law, the raft of proposals under Financial Markets Conduct Bill 2018 will be a new area for financial sector players to adjust to. This is happening in a sector that recently switched to new disclosures of non-performing loans in line with International Financial Reporting Standard (IFRS) 9. In addition, the 2018/2019 budget, has another regulation in store for them; Treasury CS Henry Rotich announced a 0.05 per cent tax on money transfers of Sh500,000 and above.

According to Barack Obatsa, the chief investment officer at ICEA Lion Asset Management, the fee will bring uncertainty in the investment market, reduce investors’ returns by at least three per cent and depress the work of fund managers.

“It is likely that investors will limit their transactions in order to minimise the costs that they will incur,” he said.

To complete an investment transaction, Mr Obatsa said, one will probably be taxed four to six times in a single investment cycle.

Barclays Kenya Managing Director Jeremy Awori cautions that the regulators have to be careful not to solve one problem using a given regulation but end up creating several others by the same regulation.

“What we need to do is make it as frictionless as possible for banks and as affordable as possible to customers to allow all businesses to focus on growth and make return for shareholders,” he says.

Mr Olaka thinks that introducing many regulations within a short time makes it hard for investors to know where to invest their money. Citing the “Robin Hood” tax, Mr Olaka said that it would alter the kind of returns that those who had invested prior to it setting in were expecting.

READ: Rotich lifts cap on cost of bank loans

“That uncertainty is what sometimes leads to a wait-and-see attitude or a wrong decision being made. Sometimes investor apathy sets in leading to slowed growth,” Mr Olaka said in a phone interview.

Data from Kenya National Bureau of Statistics, for the first quarter of the year, shows that the Financial and Insurance sector grew by 2.6 per cent compared to 5.3 per cent in the first quarter 2017.
This is on the back of the sector recording a decelerated growth form 6.7 per cent in 2016 to 3.1 per cent in 2017, being the slowest growth in a decade.

The National Treasury has committed to remove the interest rate cap to trigger banks to reopen taps of credit. While this is good for banks, it presents another uncertainty for investors who may want to finance their projects on credit. Repealing of the rate cap may lead to a hike in cost of credit, pushing pressure on repayment.

Some of the other sectors that have witnessed changes or looming changes in regulations include mining, retail market and education. For instance, investors in school uniforms may face disruption if the proposal to have all schools wear same colour of uniforms go through.