Only one out of three applications are likely to be approved as banks shift focus from personal and small business loans — considered risky after introduction of the rate cap law — to short-term government securities, Business Daily Africa reports.
A survey by the Kenya Bankers Association (KBA) tracking the market adjustments since August 2016, when commercial lending rates were fixed at four percentage points above the 10 per cent Central Bank Rate, showed while application for loans have increased banks are not disbursing as much.
The report indicated there were more than 3.2 million loan applications — the highest since the rate caps came into effect — between May and June this year, but banks only approved about 1.1 million of them.
“Banks seem to be increasingly focusing on effective management of savings and fixed deposits. The shift from unsecured credit is evident,” Jared Osoro, KBA director of research and policy, said at a press briefing last Thursday.
The law on interest rates also imposed a minimum deposit rate of 70 per cent of the benchmark rate, which meant consumers are now getting a higher return on savings than before.
Mr Osoro said banks were willing to sacrifice profitability on a pedestal of safer investments in government securities despite data showing they were at times getting negative real returns on investment due to double-digit inflation in the first half of this year.
An investment has negative real returns when the rate of inflation exceeds its percentage gain.
Kenya’s inflation trended above 11 per cent in April and May, slightly above the three-month and six-month Treasury bills yields at the time.
Banks have also introduced measures that have made it difficult for borrowers to qualify or finance their loan applications.
These include heightened scrutiny of applications and an increase in the number of prequalification fees.
The KBA survey showed loan disbursement started declining as soon as the rate cap law came into effect in September 2016.
The disbursement between August 2016 and June 2017 dropped by nearly a third to 750,000 from 1.1 million, despite an increase in application in the second quarter of this year.