Removal of interest caps an old conversation – Oigara

Kenya Bankers Association (KBA) Chairman and KCB Chief Executive Officer Joshua Oigara has hinted at the sector’s acceptance of the prevailing interest rates, suggesting players in banking may have chosen to move on from the push to have parliament lift the holds on interest rates.

Oigara, who spoke at KCB’s Group investor briefing on Wednesday, termed the yet to be extinguished conversations on the repeal as old saying bankers are better placed to explore new and innovative approaches to availing credit to Small and Medium Enterprises (SMEs) irrespective of the direction interest caps take.

“We’ve got to move away from holding these conversations as they will never take away the caps from the industry. Long term interest rates are in any case likely to hold at the current rate of between 13 and 15 percent,” he said.

The KCB boss, who maintains optimism for the recovery of private sector credit across 2019 from the near two-year free fall, says banks are ready to avail loans to SMEs irrespective of amendments to the banking act and spots opportunity in the ongoing digital disruption.

“You only need to look at the numbers, our total lending from the bank across 2018 was Ksh. 38 billion but we could lend Ksh. 54 billion worth of short-term loans via the mobile route. Collectively mobile loans are way ahead of what banks are doing. For instance, Tala and ourselves are lending in excess of Ksh.200 billion (USD 2 billion) in an year through leveraging the digital platform,” Mr. Oigara added.

Digital lending has grown to increasingly serve riskier borrowers as it sits outside the purview of the interest capping regime while deploying algorithms to determine the credit worthiness of borrowers as a loan-loss provision tool as opposed to the traditional reliance on collateral as cover to the occurrence of losses from loan issuance.

The wider financial sector shares similar sentiments to those echoed by the Kenya Bankers Association with Central Bank Governor Patrick Njoroge and Treasury CS Henry Rotich, both hinting and the undertaking of reforms geared at addressing deep rooted credit issues to include consumer protection provision as opposed to a solid push for the absolute removal of caps.

The Treasury CS in his 2018/19 budget presentation to parliament hinted at the formulation of a risk sharing guarantee structure through a partial credit scheme by the ministry to facilitate credit access to SMEs.

Rotich says Treasury remains engaged with parliament to prioritize on the design of a mechanism that will assure the fair treatment of borrowers by the financial sector.

“The removal of caps will not lead to an increase in credit as long as we don’t resolve the underlying issues. In addition to the need for consumer protection, there are a number of other factors responsible for the high interest rates including unscrupulous lenders and legal constrains in collateral management which likely push up loan repayments rates. There is a whole infrastructure to sort out,” CS Rotich said in an earlier interview.

Private sector credit to SMEs has fallen to about 10 percent of the nearly Ksh. 3 trillion loan book represented in Kenya’s lending market to leave the small and micro units in a precarious position which is further compounded by delayed government payments  for the delivery of goods and services.

Lenders have continued to lobby for a prompt payment mechanism by the state to ease cash-crunch concerns by SMEs with a view of de-risking the sector to better address the funding gaps to Kenya’s largest workforce producer.

Private sector credit has been on a free-fall since the introduction of the rate cap regime in September 2016 and closed 2018 on a dismal 2.4 percent growth rate according to data compiled by the Central Bank of Kenya (CBK).