Kenya’s Co-operative Bank has witnessed the largest year-on-year loan growth among local banks of 15% loan, despite parliament passing a law that caps commercial interest rates.
This amendment, passed in August last year, puts a cap on lending rates at 4.0% above the central bank rate. It led to a 16-month low in private sector credit growth to 4.3% (from 18% in the previous year).
The move was criticised by the International Monetary Fund, which warned that should the cap be maintained, it would cut the country’s economic growth rate. The Kenya Bankers Association also highlighted that SMEs could struggle to get loans as a result of the cap.
And a report by Cytonn said capping interest rates might solve the high interest rate spreads in the banking sector but would lead to other challenges such as locking out of SMEs and other “high risk” borrowers from accessing credit as banks will prefer to loan to the government.
Cytonns’s analyists said the loan growth experienced by the Co-operative Bank was the result of a diverse loan book, which included personal loans as well as loans to SMEs and corporates. Together these accounted for 65% from the bank’s loan book. The bank also reported a 6.9% deposit growth and a loan to deposit ratio of 87.9%.
The bank has boosted loans to SMEs, which now account for 8.8% of its loan book, an increase from 6.8% in the previous year. Earlier this year the bank reached an agreement with general Motors East Africa to enable SMEs to receive 95% financing to buy vehicles.
Speaking to Business Daily Africa, chief executive Gideon Muriuki said the bank’s fair lending approach helped it cope with the cap since its pricing was already low. Higher volumes also compensated for the lost interest income cause by the cap, he added.
Cytonn’s report also stressed that banks with operations in South Sudan, including the Co-operative Bank of Kenya, had continued to be adversely affected by political instability in the country, which led to hyperinflation and devaluation of the South Sudanese pound.
