(Bloomberg) -- A decision to cap Kenyan interest rates may favor the biggest banks as small lenders will struggle to raise cheap deposits to fund lending, according to Equity Group Holdings Ltd. Chief Executive Officer James Mwangi.
At least 30 of Kenya’s 42 lenders may have difficulty paying the minimum for deposits as demanded by a new law on interest rates that came into effect on Sept. 14. The legislation limits borrowing costs at 400 basis points above the Central Bank Rate that’s currently at 10.5 percent, and compels banks to pay at least 70 percent of the CBR on deposits.
“Tier II banks and those with low deposit rates will struggle to attract deposits, will struggle to lend,” Mwangi told analysts at a briefing in the capital, Nairobi, referring to mid-sized lenders. Micro-finance institutions and savings and credit co-operative societies, or Saccos, “will struggle to defend their market share.”
Kenya uses a weighted composite index that includes net assets, deposits, capital and reserves to rank its banks. Large lenders have a weighted index of 5 percent and above. Only seven financial institutions, including KCB Group Ltd., Co-operative Bank of Kenya Ltd., Diamond Trust Bank Kenya Ltd. and Commercial Bank of Africa Ltd. qualified as large lenders in 2015, according to the Central Bank of Kenya.
Some lenders intend to do away with savings accounts because of the new legislation, Nairobi-based Cytonn Investments said last month, a move that may prove fatal for them, according to Mwangi. Equity, which introduced four fixed-deposit accounts on Wednesday, also has as much as 100 billion shillings ($987.9 million) for additional lending, mostly targeting companies rather than retail borrowers.
“Banks refusing deposits are shooting themselves in the head, not leg,” he said. “Banks can only solve this problem by volumes.”
Equity has a 10 percent market share, 11 percent of the nation’s total loan book and nearly a fifth of the industry’s profits, Mwangi said. The lender’s share price has dropped 30 percent since President Uhuru Kenyatta approved the new law on Aug. 24.
The bank is extending credit at 10.5 percent for its best clients and paying as much as 10 percent for term deposits, Mwangi said, adding that he expects an average 12 percent lending rate for the industry. Borrowers paid an average 18 percent for debt in June, according to the central bank.