Mergers will lead to better lending rates


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Populist will appears to have succeeded where Central Bank governors failed. Until the law capping interest rates came into force in 2016, Central Bank managers had tried in vain to address concerns that the country is over-banked through policies that tried to weed out weaker players from the scene.

Universal banking, higher capital, prudential ratios and fit and proper requirements were among the avenues through which monetary authorities hoped to accelerate mergers and acquisitions in the banking sector. However, they had failed to appreciate fully the business egos involved, first, among individual owners and, second, among community banks that served a small section of the population.

During the troubled reign of Prof Njuguna Ndungu at CBK, the universal banking concept was dropped to introduce specialist institutions — deposit-taking regional and national microfinance banks — that could operate at capital levels below those of mainstream commercial banks. Their operation, by virtue of serving high-risk clientele in the largely informal micro, small and medium enterprises soon found it difficult to survive.

With depositors having little confidence in smaller institutions, the microfinance banks struggled for liquidity and increasingly relied on mainstream banks, private equity and other lines of credit to meet the demands of customers. As a result, their loans were substantially more expensive than those of mainstream banks.

Since the interest rate capping law came into force, it meant survival would be literally for the fittest. It meant creating efficiency to operate profitably within the narrow interest margin, making more money from fees and exploiting the government’s appetite for borrowing. Physical branches and non-core staff became the first casualties as mobile phone banking became the predominant type of service.

That has forced banks to look for a critical mass of business outside lending, leading to recent mergers — the most notable being that of KCB, NBK and Imperial Bank and that of Commercial Bank of Africa and National Industrial Credit. Whether this is good for the economy will unfold in due course. For now, the theory is that bigger efficient banks would lend to customers at more affordable rates.

They would also invest abroad and create more wealth for shareholders. However, in a market where banks are mostly lending to government and earning fees on delivering public services, this is overly optimistic. A critical section of the productive sector is being left out of the credit system, explaining the increasing popularity of unregulated online lenders.

While the scenario could drastically change if the interest-capping law is modified to allow for mobilisation of cheap deposits, it behoves the government to channel more credit, including the youth and women funds through regulated, grassroots and member-based institutions like Saccos.


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