Central Bank of Kenya (CBK) Governor Patrick Njoroge has said the regulator will enforce strict controls to ensure that banks avoid predatory lending, at a time when most lenders are still reluctant to extend credit to the private sector despite the removal of legal caps on cost of borrowing.
The CBK will be keen on enforcing the Kenya Banking Sector Charter to help free up access to affordable credit in a drive to raise lending to the private sector by double digits this year.
Dr Njoroge warned banks against overcharging borrowers, saying there was no room for a return to the pre-rate cap era that he described as the “Wild West”, when banks could charge interest rates as high as 25 percent.
“We do not expect after lifting of the caps that banks will go to the same old same old Wild West sort of manoeuvring,” Dr Njoroge warned. “We were doing lazy banking before; let’s give them the training so that they can move to the new environment”.
He said CBK had been working with each of the banks and in the context of the banking charter “and they have to come up with a plan and indeed even made presentations to us.” He spoke a day after the CBK’s Monetary Policy Committee (MPC) lowered its benchmark lending rate for the second time since May 2018 – signalling commercial banks to cut the cost of loans once again.
“The credit growth that we are projecting for the year is 11.8 percent,” Dr Njoroge said.
The MPC on Monday cut the Central Bank Rate (CBR) rate by 25 basis points to 8.25 percent, saying the economy was operating below its potential. It had lowered the rate from 9.00 percent to 8.50 percent last November — the same month when Kenya lifted the cap on commercial interest rates.
The lowered CBR in November was expected to signal banks to cut lending rates to boost supply of credit and put money in the hands of consumers, which would in turn boost demand for goods and services.
Credit to the private sector grew by 7.1 percent in the year to December, compared to 6.6 percent in the year to October — a marginal increase that is below the ideal growth level of between 12 and 15 percent needed to support economic growth.
Should CBK’s projection of a credit growth of over 11 percent be attained by banks this year, the double-digit growth would return the country to a 42-month high last witnessed in May 2016, four months before the introduction of the rate cap. In May of that year, credit growth to the private sector stood at 11.1 percent but dropped to 4.8 percent the following September after the introduction of the rate cap.
A recent spotcheck by the Business Daily indicated that some banks were yet to send out notices to their customers informing that thehy had adjusted loan rates close to two months after the CBR was reduced from nine to 8.5 percent. The banks were still charging 13 percent on loans as at Monday, the day the CBR was further lowered to 8.25 percent.
Dr Njoroge said the banking sector regulator was in touch with lenders on a monthly basis to ensure their new lending models that are based on risk assessment and do not exploit consumers.
“This is like training someone on a new language and the banks operate at different levels, so we do not have a specific timeline on when it will eventually kick-off,” said Dr Njoroge. “This is in the context of everything we are doing, including the removal of the interest rate cap.”
Some of the banks that have lowered their loan rates have shortened the repayment period, essentially varying the contracts.
This means that a borrower is denied some relief on cash flow because banks are keen on getting rid of the old loan books faster to pave way for new loans charged at rates outside the rate cap.
Kenya in September 2016 capped commercial lending rates at four percentage points above the central bank’s benchmark rate in an attempt to limit the cost of borrowing for businesses and individuals. Although the aim was to help small traders access capital at affordable rates, the cap had the opposite effect, as lenders deemed SMEs as too risky to lend to, arguing they could not price risk accurately while the cap was in place. The lifting of the cap was expected to boost access to credit. However, there are fears that the removal of the cap will expose borrowers to costly lending rates, which had touched a high of 25 percent before the introduction of the ceiling.
Dr Njoroge had late last year urged bankers to adopt a new sense of social responsibility in pricing of loans, just days after the legal cap on borrowing was lifted in a move that was expected to unlock credit to the economy.
“We do not expect some sort of random model. It has to be a robust model. We don’t want to be thrown into a black box model. Maybe a chicken farmer should be assessed at a lower risk,” he said yesterday.
Banks have pledged not to go back to the exorbitant interest rates they were charging before the introduction of the rate cap even as several of them move to readjust to higher rates.
“We must satisfactorily respond to the question at the top of every Kenyan’s mind…‘What will be different this time?’ said Dr Njoroge.