Kenyan bank shares pummelled by lending rates cap
By Duncan Miriri NAIROBI (Reuters) - Shares of Kenya's biggest lenders fell to multi-year lows on Thursday and the central bank was forced to sell dollars to keep the exchange rate stable after the president signed a law capping commercial interest rates. President Uhuru Kenyatta signed the amendment law on Wednesday, accusing banks of failing to honour past pledges to lower their rates. The law caps commercial interest rates at 400 basis points above the central bank's policy rate, now 10.5 percent, and sets the minimum deposit rate at 70 percent of the benchmark rate. Armando Morales, the IMF resident representative in Kenya, said the new law was likely to lock out small borrowers as banks shun consumers who are deemed too risky. Shares in KCB Group, which operates Kenya's biggest bank by assets, fell 9.9 percent to 29.50 shillings ($0.2912) each, a four-year low. Equity Bank fell to a two-year low while other lenders were also not spared as nervous investors offered millions of shares for sale without reciprocal demand. "There was blood on the dance floor. Let's call it a terrible Thursday," said Daniel Kuyoh, a senior investment analyst at Alpha Africa Asset managers. The Kenya Bankers Association, which represents all lenders, said on Thursday it would comply with the law, once it comes into effect in the next few weeks. Kuyoh said investors were dumping banking stocks due to uncertainty over how the new law will be implemented and how it will affect lending by commercial banks. "We will be expecting volatility probably till the end of next week," he said. On Wednesday, Kenyatta said the government was still committed to a liberalised economy, adding it was time for banks, which enjoy the highest returns-on-equity in Africa, to pass on the benefits of the growth in the banking sector to their customers. Analysts read political considerations in Kenyatta's decision to sign off the law. He faces re-election for a second and final five-year term next August. "The decision may have been influenced by the close proximity of the 2017 presidential elections and we think this could have negative consequences for the banking sector as well as the economy," said London-based frontier market specialist, Exotix, in a note to clients. The East African nation had been held up as a model of rapid financial inclusion, after it increased the share of the population with access to formal financial services 50 percent in the last decade, to 75.3 percent of its 45 million people. A tightening of supervision by the central banks after three medium and small sized lenders collapsed in the nine months to last April has however put pressure on private sector lending and Morales said the new law could worsen that. "Credit growth is an area that is now under stress," Morales told Reuters. Before Kenyatta signed the law, the IMF shared the Treasury's and the central bank's preference for the use of other measures, like fiscal consolidation, to lower commercial lending rates over time. "That explains the haste by some parliamentarians to find a short cut but unfortunately from international experience these shortcuts are never as effective as they look on the surface," the IMF's Morales said. ($1 = 101.3000 Kenyan shillings) (Editing by Angus MacSwan)
