Category Archives: Interest Rates

Banking Week: Interest caps go and Stawi starts

Interest-Caps: This week saw the end of the era of capping of interest rates, that was seen as a populist three-year experiment to reign in large banking-sector profits.

The Government had tried to repeal this, without success, several times over the last few years, and bankers and the IMF have also been vocal about the unintended, and detrimental effects of the caps, on the economy.

Parliament stuck to its guns to the last minute, making farcical attempts to keep the caps in place. But as only 161 MP’s were present to vote, they could not proceed to over-ride the President, as they needed 2/3 of Parliament to be present. While some lawmakers have in the past argued that this high constitutional threshold (of requiring a vote of 233 MP’s) gives the President power to make laws, this has been upheld by the Courts.

The caps did not stop the “super profits” at large banks, but they did weaken smaller banks by limiting their interest-income growth. In the interest capped era, large banks found shifted their lending lend to a national government with an insatiable borrowing appetite, as opposed to small businesses, and when these credit lines shut off, small banks were hit with a rise of non-performing loans.

Stawi: This week also saw the formal launch of Stawi after a pilot phase in which that 80,000 had signed up for this banking industry response to the mushrooming of unregulated loan apps.

Stawi aims to promote savings and lending for small businesses. It is a bank account, opened and operated on phone, and owners can move money through M-pesa (for a flat fee of Kshs 42) and Pesalink. Stawi is hosted by the Commercial Bank of Africa, and, like with its M-shwari product, banking services are only rendered on the app, not at branches.

Users of Stawi have to be registered and in business for six months. New users are encouraged to make Stawi their primary account and to channel transactions through it to get a borrowing limit.

On downloading the app, one is assigned a loan limit based on credit their credit history. Stawi offers unsecured loans of between (~$292) KSh30,000 to (~$2,432) KSh250,000 that can be repaid between one to twelve months at rates of 9% per year.

(Non) Banking Challenges in Kenya

In an interview with the Financial Post, Kenya Commercial Bank’s Chief Executive Terry Davidson lists the four main challenges facing the banking sector as:

(i) Uncertainty over the Banking Bill: Implementation of the “in-duplum” rule, which, if applied retroactively for several years back will wipe out many local Banks.
(ii) Infrastructure: the expensive and poor conditions power, roads and communications needs to be addressed – this will reduce the cost of banking and eventually lead to banking costs for account holders
(iii) Insecurity: KCB spends Kshs. 15 million a month on security guards, which is not prudent. If the security situation improved, Kenyan banks would not have to pay as much for security.
(iv) Judiciary: It takes years for cases to be heard, and all banks have backlogs of pending cases, while others are postponed endlessly.

Microfinance warning

The Association of Microfinance Institutions of Kenya released a statement refuting allegations that microfinance institutions are defrauding Kenyans.

They point out that a lot of loan sharks/shylock operators are pretending to be microfinance institutions and causing the confusion – and that that micro-finance loans average about 30,000 shillings, which is not enough to finance the car/matatu purchases that many Kenyans are signing on with these shady operators.

Banks: bad for your company’s health

According to Jaindi Kisero, the Nation business editor, many local companies are doomed to fail if they continue using overdrafts and short-term borrowing for their long-term plans (as the Hillcrest schools apparently did). It is a result of the failure of Kenyans to develop appropriate sources of capital for growth such as long-term loans or taking in new shareholders.

Is the era of Personal Loans Over?

The Central Bank Governor, Dr. Andrew K. Mullei, was on KTN last night announcing that he was going to raise interest rates to slow down the growth of private sector credit, and by extension inflation.

He however decried that Bank’s had raised their lending rates too quickly (at least five bank’s announced interest rate hikes this week of about 2%).