Small banks seen suffering in interest cap era

The introduction of capping of the interest rates will see the small banks in the country risk going out of business.

According to research from Britam Asset Management (BAAM) smaller banks deal more with the high risk borrowers, a factor that is likely to squeeze them out of business.

BAAM Chief Executive Officer Ken Kaniu said larger banks will be the greatest beneficiaries of the new law capping bank interest rates as the law squeezes medium and small banks’ margins.

“Medium and small banks will suffer higher non performing loans due to their exposure to riskier micro, small and medium enterprises loans. Asset quality will be a key focus going forward as banks try to keep cost of risk low to cushion their bottom line,” Mr Kaniu said.

According to the report, Kenya has seven large banks with a market share of 58.2 percent, 12 medium banks with a market share of 32.4 percent and 21 small banks with a market share of 9.2 percent as at 2015.

Mr Kaniu said the top seven banks also command 70 percent of the sectors profits indicating that they are able to better manage their assets and grow shareholder value.

The firm highlighted that banks are expected to increase focus on growing non-interest income to compensate for the decrease in interest income.

“We expect banks to step up efforts to improve efficiency by making alternative channels, which are more cost efficient, more attractive to customers,” he said.

Banks are likely to increase their investment in government securities in the short term due to the attractive risk-free yields. Large banks will also seek to grow market share by attracting customers from medium and small banks by offering cheaper loans.

He cited some of the key risks that could arise from the new rate capping including credit rationing and high inflation.

Banks will also experience increased uncertainty in loan pricing since the new framework requires immediate reprising of all loans once the base rate is adjusted.

Despite the those risks the company highlighted some opportunities that have been brought about by the new law like improved earnings from companies due to lower finance costs, the development of a savings culture as a result of the high deposit rates.

Aligning the lower lending rates with high demand for affordable housing may also drive growth in mortgage products.