Size of loans up but small firms ejected from lending market
6 months ago, 17 Apr 07:50
The average loan size has risen from Sh400,000 to about Sh600,000 since the debut of the rate capping law in September 2016 as lenders shower large borrowers, deemed less risky, with cash.
Bank and microfinance numbers for up to February this year show that lenders continue to shun small firms.
This, Central Bank of Kenya (CBK) Governor Patrick Njoroge said, has resulted in the overall reduction in customer accounts.
“There has been reduced intermediation by banks resulting in a significant increase in average loan sizes arising from the declining number of loan accounts, and large banks shunning smaller and risky borrowers in preference to big borrowers,” Dr Njoroge said in a presentation to Parliament.
Private sector credit grew just 2.1 per cent in the year to February, well below CBK’s target rate of 12-15 per cent.
The Banking (Amendment) Act, 2016, which came into force on September 14, 2016, caps loan charges at four percentage points above the Central Bank Rate (CBR now standing at 9.5 per cent.
It requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.
“Banks stopped giving lower ticket loans and then the people who were borrowing started seeking top-ups or refinancing.
"Any new facility that was being given was focusing on high-value loans,” former Creditinfo chief executive officer Kamau Kunyiha said earlier.
CBK has at the same time warned over the risk of declining capitalisation in banks as a result of the law.
Decline in earnings
“Decline in earnings over time may pose risks to financial stability through reduced capacity to build capital buffers to absorb shocks,” said Dr Njoroge.
While pushing for the removal of the law, the CBK said it has instituted several reforms, including a cost of credit site, aimed at increasing transparency in the pricing of banking products coupled with strengthening of credit information sharing mechanisms through promoting the adoption of CRB scores and analytics in credit extension.
“The removal of interest rate caps is critical to developing a market-led financial sector; however, the banking sector must fully demonstrate that it is responsible and disciplined,” said Dr Njoroge.
“In pursuit of developing a responsible and disciplined credit market, CBK is proposing to issue the Kenya Banking Sector Charter.”
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