Customers in a KCB banking hall.[Photo/Businessdaily]
Last year was the first full-year of operation by commercial banks in a regulated interest rate regime. Parliament passed a law that capped interest at four per cent above the Central Bank Rate (CBR), and the deposit rate at 70 percent of the same rate.
The law came into effect in October 2016. The effects of the rate cap on the performance of individual institutions show a sector that has been completely scattered as individual banks were forced to confront the realities of the harsh new regime, and the effect on their viability and profitability.
In the previous regime of fully regulated interest rates, commercial banks simply piled premiums on their base rate, a figure that was largely arbitrarily determined and given to their customers with the biggest muscle. The subsequent increments in payments by increasingly stressed borrowers enabled the banks to maintain ever-booming profits. The status of the economy seemed to have little or no effect on the profitability of banks.
As such, the whole of the banking sector was awash with booming profit growth, even as non-performing loans grew alarmingly. Central Bank of Kenya, the sector’s regulator, preferred to ignore the obvious correlation. Banks could not care less.
Further, their behavior was very predictable. All they simply did was line up behind the dominant players, the so-called tier one banks, and move their interest rates up and down in tandem, creating a cartel-like behavior in the lending sector.
In contrast, the new regime of interest caps has created every bank for itself attitude. With a maximum rate beyond which they cannot charge, keeping costs tamed has become the holy grail. The full effect of the new regime and how it has scattered banks can be seen clearly from the third quarter trading results of the year to September 2017 that were released by the institutions recently.