This archive report was first published on 6 September 2019.
On September 6, 2019, Fitch Ratings published a report titled Large Kenyan Banks: 2019 Peer Review, highlighting the unintended consequences of Kenya's lending rate cap.
The cap, implemented to make credit more accessible and affordable, has had the opposite effect. Banks have become hesitant to lend to small and medium-sized enterprises (SMEs), leading to subdued earnings.
According to Fitch, the rate cap has limited banks' ability to price correctly for risk, causing them to focus on government securities with attractive yields and lower risk. This shift has resulted in a slowdown in lending to the private sector, particularly SMEs.
Despite the cap's intention to increase credit accessibility, loan growth has been dampened. In 2018, gross loans grew by a mere 5%, compared to 6%, 7%, and 17% in 2017, 2016, and 2015, respectively. The spread between loan and deposit rates has also more than halved.
The rate cap has also led to asset-quality weakness, with losses rising when certain industries are starved of credit. The non-performing loans (NPL) ratio for the eight largest banks increased to 8.9% at the end of 2018, up from 6.6% at the end of 2017. The average NPL is expected to reach 10% by the end of 2019 due to persistent asset-quality pressures.
