Kenya’s interest cap continues to hurt bank profits

A law capping interest rates continues to pile pressure on Kenyan banks, with at least three banks posting a drop in earnings in the first quarter of this year.

NIC Bank, Stanbic Bank and Kenya Commercial Bank (KCB) posted 3.9 percent, 9.3 percent and 1.9 percent decline in profit, with the performance attributed to the capping of loan rates.

Kenya introduced the law to cap interest rates in the third quarter of 2016, with the move aimed at deepening access to credit especially among small borrowers.

The rates were capped at 4 percent above the Central Bank Rate which currently stands at 10 percent. Banks, therefore, are currently charging borrowers a maximum of 14 percent, down from between 18 and 28 percent.

The result, however, is that commercial banks are reeling from the effects of the reduced earnings as the law leads to unintended outcomes, including layoffs and slow credit growth.

Financial results of the three banks released last week indicated the squeeze the banks are facing following the implementation of the law. KCB posted a 1.9 decline in core earnings per share to 14.4 billion U.S. dollars from 15 billion dollars.

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