Q&A: Policies needed to increase uptake of affordable credit in Kenya
Since the Jubilee Administration took office in the year2013, Kenya’s public debt crossed the Ksh7 trillion mark in August 2020, comprising Ksh3.4 trillion in domestic debt and Ksh3.7 trillion in foreign loans.
And during the first sitting of 2021 for the Central Bank of Kenya’s (CBK) Monetary Policy Committee (MPC), over 54 percent of loans in the country were restructured following the advent of the coronavirus pandemic, representing Ksh.1.6 trillion of the Ksh.3 trillion in terms of loan book for banks.
Metropol TV reached out to Sam Omukoko, the General Managing Director of Metropol Corporation and the Chairman, Kenya National Chamber of Commerce (KNCC) to help in understanding the health of the banking industry in the country.
What does loan restructure say about the health and stability of the banking sector in the country?
In the short term, banks will experience increased defaults. Because even if you have restructured my loan and my business is not back I will still not repay that loan. I think the banks cant address this problem alone. The government needs to step in in the sense that with a little stimulus package, governments will push businesses back into businesses and as cash flows begin to improve, then businesses will start to repay loans.”
The CBK did a survey which said that 90 percent of Kenyans say access to credit has not changed while 10 percent say otherwise. What can this be attributed to the disconnect and how can an increase for the uptake of credit be mitigated in the country?
We have not gotten to a point where banks price risk in this market, CBB has been pushing for risk-based-pricing and that can only take place because CRBs are operating and active ratings of businesses are taking place in the market. CRBs have matured they are able to provide information that banks require to calculate customer risk and price that risk. It is a journey that until the lender is able to price risk, that’s the only time the interest rate factor will come into the equation. Currently, they still tend to give blanket interest rates so you don’t feel you have an advertence because you are a lower risk borrower are not being rewarded in the market. Banks would benefit more if e.g. were able to charge a little bit more for marginal borrowers, then the low interest rebuts given to low-risk customers would be compensated for by charging marginal customers slightly higher interest rates, then we would see a dynamism movement in terms of risk related to interest rates as it were.”
According to KNBS, financial and insurance sectors in the third quarter of 2019 grew by over 5 percent compared to the third quarter in 2018 which grew by about 8 percent. What can the contraction be attributed to?
I would attribute the contraction more to COVID-19 because of the drastic impact it had on many businesses. Yes, the interest rate cap had been removed but it has not been possible for the banks to determine the risk of a borrower during this COVID-19 period. I think we looked at some of the risk algorithms and you find that it’s not possible to predict what would happen in the next 6 or 12 months. Without that ability to predict it becomes hard for the banks to put certainty on the lending. So banks have become extremely selective and go only to those customers who have a very viable business and have a good track record in repaying loans. Do not try anything new unless you are certain that the situation has changed.
SMEs have had knee jerk in their businesses with equity in partnership with KNCC announced a Ksh200 billion up for grabs for the sector for them to revive business during COVID-19. How is the uptake for these credits and how far has it gone in terms of impact?
It was a good arrangement between KNNCI and Equity Bank, where Equity has a specific target for the MSME market I think they are looking to access 3 million MSMEs in the market in the next five years. For NCCI it was a culmination of a mandate that they can be able to connect their members to the institution. How the programme was to be package was that the sector had to go through a training programme before they qualify to access the funds which is 100 percent unsecured. There was a slow process of start-up issues of training also some having to register as members of the chamber before being able to access that stimulus package.
The capital markets in the country have been touted as the go to place when seeking long-term financing. However, people and businesses are not seeking finances but are instead going to banks and trying to do a consolidation of banks in order to have access to these funds. Why are people not going for funds either in bonds or Initial Public Offering (IPO)?
I have always argued that within our financial sectors there has been a structural challenge because we have a financial sector that is dominated by the banking industry and what we call the crowding-out effect. Because of the strong banking industry, banks are able to provide both short and long-term funds available to corporates and other entities. Previously the challenge with Capital Markets Authority (CMA) was the process, that it was taking too long to get CMA to process and authorise and issue corporate bonds. When we had commercial paper, which is a direct competitor of overdraft facility for working capital. What the banks did is that they were able to provide that money in a much shorter time with much better benefits than what anybody could get in the capital market. The ability of Capital market to respond to the needs of the business have been such that banks respond faster than capital markets, banks have also been allowed to extend long term lending using short term customer deposit. E.g banks which give mortgages which give 15-20 years but have not raised this cash from long term finances like capital markets…so what you do is that you work out the probability to say that you’ll always be in business and that short term funds as they come in will continue to fund your long term lending in the market which I think is a problem.
What sort of policy interventions are needed in the country to increase the uptake of affordable credit?
The use of ratings by lenders should become a mandatory thing. Customers should also be able to know that rating provides a measure of their risk and if customers can use their ratings to negotiate better terms of credit from lenders, that would a good move. As far as supply and demand are concerned, the demand for credit is high and supply for credit fund is available except for the pricing structure in the market is what has never been gotten right at any one time since the banking history of this country.
In 2019, the parliament agreed to ditch an interest rate limit that was introduced in 2016 to curb high borrowing costs. The cap had been blamed for choking business activity and economic growth.