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Kenya parliament not in support of loan rate cap repeal

    Faith Mwangi
    Faith Mwangi

    Equity Research Analyst, Financials (East Africa)

    Tellimer Research
    10 September 2019
    Published by

    A parliamentary committee has opposed a proposal by National Treasury to have the interest rate capping law repealed. This was expected in our view. The proposal to repeal the loan rate cap was contained in the Finance Bill 2019, which is currently before the National Assembly. The members of the Finance and National Planning Committee of the National Assembly opposed the move on the grounds that it will make lending more expensive to clients. Prior to the rate cap, loan interest rates stood at 18% compared to the current 12%. In response to the members of parliament, Treasury noted that private sector credit growth had declined significantly, which has curtailed economic growth. 

    Members of Parliament remain open to loan segmentation, a likely scenario. Though the news does not surprise us, we note that some members of parliament remain open to segmenting loan interest rates into risky and non-risky borrowers. This is in line with a proposal made earlier by Moses Kuria. In his proposal, Moses Kuria introduced a separate category for risky clients who would attract a lending rate of 600bps above the level for SMEs and unsecured individuals, implying loan yields of up to 19%. In our report, Kenya Banks: Asset quality, the defining puzzle piece, we determined the overall sector would record an average 590bps rise in ROE if this proposal was to pass.  We believe members of parliament would be willing to consider a segmented loan rate cap repeal, but it is unlikely that a full repeal will see the light of day. 

    Remaining process. The Finance Bill is still due for the 2nd Reading and 3rd reading, where the lower house will debate the merits of the bill and any changes proposed will be accepted. After this, the bill will proceed to the president for assent. By law, the Finance Bill 2019 must be passed within 90 days of the passing of the Appropriation Bill. This means Parliament must debate and pass this bill by the end of September.

    Equity Group set to be the biggest gainer in the event of amendment. In our report on the asset quality of Kenya banks, we ran a scenario analysis on Kuria's proposal and determined that Equity Group would record the highest uplift in ROE of 690bps. This is mainly due to its large high yielding SME and retail loan book. DTB would record the lowest, with a mere 350bps rise in ROE. DTB’s margins will remain under pressure due to preferential pricing accorded to its shareholder affiliated clients. 

    KCB is our top pick in the sector at a target price of KES54.00 (ETR of 50%). This is based on: 1) KCB Group’s large retail and corporate market share, boosted by the government’s shareholding in the bank; 2) the increasing contribution of non-interest revenue from alternative channels; 3) its sector-leading net interest margin; and 4) its continued high efficiency, delivering a lower cost/income ratio.