Kenyan lenders must adjust their business models to adapt to a new era of lower profits as interest-rate caps curb investor returns, Central Bank of Kenya Governor Patrick Njoroge said.
Return on equity in the Kenyan banking industry declined from 18.2 percent in June last year to 13.6 percent in March, Njoroge told reporters in the capital, Nairobi, on Tuesday.
For the country’s biggest lenders, the drop was more severe, slumping to 23 percent from almost 35 percent.
That compared with an average of 17.4 percent for South Africa’s four biggest banks and 22.3 percent for Nigeria’s top lenders, according to data compiled by Bloomberg.
Lenders are “entering a world where there will be smaller interest margins,” Njoroge said. “Returns will be much smaller.”
The top five banks in Kenya last month reported a decline in first-quarter profit as the Kenyan government-imposed cap on commercial lending rates curbed loan income.
The ceiling, set at 400 basis points above the central bank’s official rate of 10 percent, might cut revenue in the industry by as much as 25 percent this year as it scales back on unsecured lending, Barclays Bank of Kenya Ltd chief executive officer Jeremy Awori said on May 11.
The “golden period” for Kenyan banks might have ended with the rate-cap law and lenders should brace for a “structural decline in profitability,” Exotix Partners LLP said in a note on May 18.
Net interest margins at banks would “remain under pressure” until next year, with the government unlikely to completely reverse the legislation, Exotix said.
The cap resulted in a 5.7 percent decline in lending to small businesses between August last year, when it was announced, and April, the central bank said.
Banks have “tightened” credit standards and are focusing more on short-term financing, even for large corporations, Njoroge said.
The regulator is holding discussions with bank executives and urging them to diversify revenue streams to build their resilience, Njoroge said.
Lenders are also being encouraged to shift from “lazy banking to real banking,” a switch that would entail them relying less on high loan charges and returns on government securities for their income, he said.
“Banks are still working under the old business models,” Njoroge said. “They need to be more forward-looking so as to be resilient, because shocks will come and they need to be ready for that.”
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