Low return on capital in Rwanda deters Kenyan lenders

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On 29 March 2017 at 01:01

The low rates of return on capital in the Rwanda’s banking sector make it an unlikely destination for Kenyan lenders seeking growth opportunities in the wake of interest rate capping in that country, industry sources say.
Last August, Kenya capped lending rates to four per cent above the central bank’s base-lending rate, settling the lowest borrowing rate to 14 per cent. While this unsettled investors, alternatives are not yet attractive enough to pull them elsewhere in the region.
KCB (...)

The low rates of return on capital in the Rwanda’s banking sector make it an unlikely destination for Kenyan lenders seeking growth opportunities in the wake of interest rate capping in that country, industry sources say.

Last August, Kenya capped lending rates to four per cent above the central bank’s base-lending rate, settling the lowest borrowing rate to 14 per cent. While this unsettled investors, alternatives are not yet attractive enough to pull them elsewhere in the region.

KCB Rwanda chief executive Maurice Toroitich said that Rwanda’s banking sector needs to find a way of generating a higher return on capital to attract any surplus Kenyan capital.

“Movement of capital is not dependant on interest rates, it depends on return on capital, there is still a big gap between returns in Kenya and returns in other regional countries, they are not yet attractive enough” said Mr Toroitich. “Banks in Kenya still make a decent return on capital, it’s around 20 per cent sector-wide, Rwanda’s banking sector stands at 9.2 per cent, which is still low.”

It has been reported that KCB Group’s pre-tax profit is likely to fall by two per cent this year as a result of the caps, while 11 listed Kenyan banks have plunged to an average of 14 per cent, with further stock falls expected in the coming months.

Although it is not yet determined who is going to move money, when or to which country, analysts have said it is possible that the banks which already have subsidiaries in other regional countries could rely on their existing footprint in those markets, however they will have to do this with caution and in a way that will not lead to dilution of capital.

Right from the time the Kenyan parliament passed the cap, it was received with misgivings.

For the past 20 years, Kenyan banks enjoyed interest rate averaging 11.4 per cent, way above the world average of 6.6 per cent. While acknowledging they were high, experts including Central Bank of Kenya Governor Patrick Njoroge did not support an interest rate peg warning it would bring rigidity in the financial system.

Data shows that private sector credit growth in Kenya had stagnated at 4.3 per cent as at December 2016, the lowest in 16 months. The IMF recently warned Kenya on the adverse effects of the interest rate caps saying it would hinder economic growth.

A KCB banking hall. The low rates of return on capital in the Rwanda's banking sector make it an unlikely destination for Kenyan lenders .

Source:The East African


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