By The Plu and Agencies
Aug 26 Shares in KCB Group,, operator of Kenya’s biggest bank by assets, fell by 10 percent at the start of trading on Friday as investors reacted to a government move to cap the level of interest that banks can charge borrowers.
Equity Bank, which serves millions of micro-borrowers, fell by a similar margin.
KCB’s shares were trading at 27 shillings ($0.2665) each while shares of Equity traded hands at 29.50 shillings as of 0648 GMT.
The plummeting shares hit the Kenyan banking sector barely hours after president Uhuru Kenyatta, has defied opposition from the central bank and industry and signed legislation that imposes limits on bank lending and deposit rates in east Africa’s largest economy.
The Kenya Bankers Association criticised the “arbitrary” move and analysts described it as “populist” and “retrograde”. They warned it would threaten Kenya’s reputation as a regional free market financial centre and adversely affect the country’s sovereign bond prices.
Patrick Njoroge, the Central Bank of Kenya governor, had publicly opposed the bill saying it would discourage banks from lending but he has been a strong advocate of banks reducing lending costs.
Under the new law lending rates will be capped at four percentage points above the central bank’s benchmark rate, which is 10.5 per cent, while deposit rates must be at least 70 per cent of the benchmark rate. Some banks are charging above 18 per cent for loans while deposit rates are often below 5 per cent.
Mr Kenyatta said he assented to the bill because after the previous two occasions parliament passed similar legislation, the “banks failed to live up to their promises” to introduce measures to curb the rates.
“Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent,” he said. “Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.”
Earlier this month, the KBA said its members would cut their lending rates by 100 basis points in an attempt to discourage the president from signing the bill. They also offered to pool $300m to offer cheaper loans to small and medium-sized enterprises.
It said after the president signed the bill “We do not feel that an arbitrary rate cap is in the best interests of the majority of people and businesses that this law seeks to support.
“The reality is that there is little evidence from other countries that such interventions have helped the majority of citizens, and in a number of countries such laws have been reversed to promote financial inclusion.”
The bill has proved extremely popular with the public and businesses, many of which struggle to secure affordable financing.
