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Tough Times for Small Banks After Cap Law Introduction

Peter Musila 2 years ago

The rate cap law has seen financial lenders in the country struggle to remain afloat despite their being an increase in loans and deposits made by the smaller banks. These have made the banks go to the extent of trading off their profitability for liquidity.

In return, a reduction in household borrowings and small businesses has been recorded as the banks seek a way to make their records tally.

“The lower rate of loans and advances growth compared to deposits has seen their relatively lower loan-to-deposit ratio, thus manifesting their conservative stance,” KBA director of research and policy Jared Osoro said.

According to the cap law, which is almost hitting its third year, loan lent was set at four per cent higher than the Central Banks rates while deposits were set at 70 per cent lower than that of CBR.

The private sector credit has been recording a slightly slower growth ever since the rates were changed.

According to the CBK data, a sharp decrease in credit growth of the private sector was recorded in January last year after it hit 1.9 per cent down from 25 percent the highest recorded in mid-2014.

Since when the cap law was introduced, the private sector managed to record 4.4 per cent as their highest lending in last year October.

“We firmly believe that a risk-based pricing framework is one of the ways that will support the resolving credit constraints that the capped credit pricing has imposed,” Osoro added.

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