Interest cap to affect lending to ‘risky’ borrowers, CBK

The Central Bank of Kenya (CBK) has warned that risky borrowers may be locked out of the formal credit market owing to the new interest capping regime.

A day after the monetary policy committee (MPC) lowered the central bank rate (CBR) to 10 percent, the regulator is concerned lenders may begin profiling customers, sticking with those who show a good ability to repay the loans.

Speaking to journalists CBK Governor Dr Patrick Njoroge said banks may stop lending to those deemed too risky.

“It’s not that this is the necessary outcome but what is clear is we have people in the margin and if the caps down because of the action of Monetary policy committee, those risky borrowers at the margin maybe cut off from lending,” Dr Njoroge said

This affirms a position held by the Kenya Bankers Association (KBA) that capping interest rates may not be beneficial to individual borrows.

According to KBA, 40 percent of personal loan borrowers are considered moderate, high and very high risk clients and are unlikely to benefit from interest rate caps.

The banking regulator however said it was still too early to tell the full effects of the interest cap law but underscored the need for cheap credit access.

“It’s unclear which way this will go. We haven’t done it before,” he said.

The CBK has been cagey with information on how the law will be applied even as banks look to the regulator for some form of clarification.

This has seen banks interpret the law in unique ways.

Banks have been staring at thinning margins as the Banking Amendment Act limits the amount payable on loans while also raising the amount payable on deposits.

Customers have expressed fears that banks may re introduce charges and levies in a bid to keep money trickling into the bank.

Dr Njoroge however cautioned banks from introducing products not sanctioned by CBK.

“We are the regulator after all. So I don’t think banks would want to attract the wrath of the regulator. They have to work within the bounds of the law,” Dr Njoroge stressed.

In lowering the CBR to 10 percent, the central bank is seeking to spur private sector lending to critical sectors of the economy.