With the capping of interest rates at 4% above the CBK rate comes an opportunity for banks to innovate and protect their income streams. They can do this through increased focus on mobile-based short term credit facilities as well as non-funded income streams.
More people can now afford loans. However, banks are reluctant to offer loans to existing customers who previously met their criteria. More requirements need to be met by customers in order to access the same services. Customers now have a tough time accessing credit cards and (un)secured loans. Perceptions on risk determine who gets the facility with riskier clients getting the short end of the stick.
Fixed and call deposit facilities are also now accessible to fewer people. New requirements such as that you need to hold an account for a certain amount of time with the bank in order to access fixed deposit services are restricting customers. Long tenures for fixed deposits have also been halved. Call deposits have been put on hold in some cases.
Banks are moving towards shielding themselves from the risk of default that will be brought about by a flood of people who can now afford to take out a loan. Collateral will become a requirement for credit facilities that did not have this requirement before. This is based on the real assumption that there will be a significant degree of default from this windfall.
Banks have also started investing more in Treasury Bills that are risk free and offer roughly the same return that they would by loaning funds to individual customers. This may be a short term move as banks wait for the waters that have been stirred up to settle. It is telling that the 364-day T-Bill is getting the most attention.
Mobile applications that increase accessibility and convenience for bank customers are currently not a significant source of funds. However, they offer an opportunity for lenders as they try to leverage on the volume of loans they have the potential to advance. MShwari-type loans could be the answer to protecting the banks’ funded income. More banks will be willing to join in advancing MShwari-type loans. This will keep people with low credit quality within the formal banking industry. Since most of them are from the unbanked population, they will be afforded some protection from predatory lending by shylocks as has been feared. Only people from selected (read known and established) companies are able to access the same loan facilities that were available to everyone. Likewise, entrepreneurs classified as less risky won’t see a significant change in their access to the facilities that they are used to. Banks have had to cut down on staff that was needed to sell credit facilities. With MShwari-type loans, some of these jobs can be saved.
More focus will be given to non-funded income streams that exist such as prepaid cards. Prepaid cards are touted as a secure way to carry cash. KCB and NIC Bank are two institutions that have put a lot of effort in making these cards mainstream.
Bankers also have the option of contesting this legislation using KBA. They can do this if they can prove that the new rates are making their business unprofitable. This could see interest rate revisions on new and existing credit facilities once in a while. An unseen consequence of this is the Monetary Policy Committee might lose its independence since they have to take into consideration bankers.
In summary, more focus will be given to customers who meet new requirements set by banks. Innovations will also be necessary to drive income growth going forward. After all, operating in white water creates opportunities in making great leaps.
Newton Kibiru, Business Development at Grant Thornton Kenya