Kenya's Top-Valued Bank Vows `No Trade-Offs' in Rate Spat

(Bloomberg) -- Kenya’s biggest bank by market value is not giving up an inch as lenders go head-to-head with the government over what they can charge customers.

The introduction of interest-rate caps in late 2016 has caused lending to grind to a near halt, spurring the International Monetary Fund to warn that growth in East Africa’s largest economy could suffer if the laws aren’t toned down or scrapped. While other lenders have seen their earnings shrink, Equity Group Holdings Ltd. hasn’t, and is holding out for President Uhuru Kenyatta’s administration to make the first concession.

“There are no trade-offs because it’s not about us, it’s about the market.” Chief Executive Officer James Mwangi said at an investor briefing in the capital, Nairobi. "Let’s remove or scrap the regulation," he said. "There’s nothing to think about, we all know it’s headed in the wrong direction."

Kenya’s National Treasury has acknowledged that the limits on interest-rate charges haven’t worked as intended and has said it will introduce legislation that will either abolish or modify the law so banks can better price loans for riskier customers, while bolstering rules to protect consumers.

No Agreement

There’s still no agreement yet on how to review the law, causing anxiety that banks will revert to charging high interest rates once it goes, said John Gachora, CEO of NIC Group Plc and vice chairman of the Kenya Bankers’ Association.

“There were reasons why this law got the support it did,” he said. “Until we address those issues completely and get people comfortable that those issues will not arise, I don’t think we can really pretend that a repeal will cure the problem.”

Kenyatta introduced the cap after ignoring the advice of the central bank as he sought to fulfill a 2013 election campaign pledge to lower the cost of credit. The law crimped bank lending with credit expansion slowing to 2.4 percent in the 12 months through December, the lowest annual growth rate since at least 2005, central bank data shows.

While some banks are pushing for a complete removal of the laws, others are willing to consider a ceiling higher than the current 400 basis-point limit above the central bank rate, Gachora said. Some have also proposed charging different rates to certain market segments.

“There’s the extreme of repeal and there’s the other side that’s saying let’s make some amendments, but nobody seems to agree,” he said. “I see more of an amendment than a repeal to be frank with you because the law is both political and emotive.”

Lower Profit

NIC earlier reported a 4.3 percent drop in full-year net income, while Standard Chartered Bank Kenya Ltd. said its annual profit declined 24 percent after earning less from interest charged on loans. Co-operative Bank Ltd., Kenya’s third-largest lender by market value, said March 15 its pretax profit this year could jump 20 percent if the rate caps are removed after reporting a 10 percent decline in 2017 earnings.

KCB Group Ltd., the No. 1 lender by assets, on March 8 reported profit that was little changed and said the caps risk destroying the industry as it called for a higher ceiling.

Equity Group has 210 billion shillings ($2.1 billion) ready for lending once the rate caps are removed, the CEO Mwangi said. Net income jumped 15 percent to 18.9 billion shillings in the 12 months through December compared with a year earlier, the company said earlier on Thursday. A surge in fees and commission income, foreign-currency gains and a drop in impairment provisions helped to compensate for a 10 percent decline in net interest income.

Kenya's Top-Valued Bank Vows `No Trade-Offs' in Rate Spat

The stock declined 1.9 percent to 52.50 shillings on Thursday, valuing Equity Group at 198 billion shillings, and paring gains this year to 32 percent. KCB has advanced 20 percent in 2018.

“Banks have no control over interest rates, it’s risks that have control over interest rates,” Mwangi said. “If you have low risk, you demand low interest rates. Our expectation is that the lessons have been learnt.”

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