Major Kenyan banks' earnings fell in the first nine months of the year, highlighting the heat from interest caps introduced a year ago.
Out of at least eight banks that have declared their financial results in the last week, seven registered declined profits, mainly blamed on the interest ceilings intended to boost access to credit, especially among small businesses.
Among the affected lenders are Barclays Bank, NIC Bank, Kenya Commercial Bank, Stanbic Bank, Diamond Trust Bank, Equity Bank and Standard Chartered Bank.
The banks recorded decline in interest income mainly due to reduced lending, which hurt their overall income.
NIC Bank's financial statement released on Tuesday shows that total operating income declined by 19 percent to 98 million U.S. dollars, from 122 million dollars.
Interest income fell to 121 million dollars, from 147 million dollars.
"The decline is attributable to a 16.1 percent decline in interest income on loans and advances to 88 million dollars from 110 million dollars, despite an increase in interest income on government securities by 14.3 percent," the bank said.
A similar scenario was recorded by Barclays Bank, whose interest income declined by 5 percent in the first nine months of the year to 188 million dollars, from 204 million dollars of the same period in 2016.
This was despite the loan book recording a 5.3 percent growth, implying that the decline was an effect of the interest-rate cap.
For Stanbic Bank, its results indicated that its profit before tax decreased by 17.4 percent to 3.8 million dollars, from 5 million dollars in the same period last year, driven by a 7.6 percent increase in operating expenses amid low income.
Interest income decreased by 7.3 percent to 120 million dollars, from 130 million dollars in a similar period in 2016.
This was attributable to low income from loans and advances and a drop in earnings from government securities.
"The average decline in core earnings across the banking sector stood at 6.5 percent, owing to the tough operating environment as a result of the interest rate caps and political uncertainty in the country that affected the business environment," said analysts at Cytonn, a Nairobi-based investment firm.
Most banks have shifted to government securities, with lending to the government by all the 17 reporting banks going up to 608 million dollars in the period.
Investment in government securities has grown by 16 percent, outpacing loan growth of 6.3 percent, showing increased lending to the government by banks as they avoid risky borrowers, noted Cytonn.
The east African nation introduced the law to cap interest rates in the third quarter of 2016, with the move aimed at deepening access to credit especially among small borrowers.
The rates were capped at 4 percent above the Central Bank rate, which was last week retained at 10 percent.
Commercial banks, therefore, are currently charging borrowers a maximum of 14 percent, down from between 18 and 28 percent.
"Commercial banks are reeling from the effects of the reduced earnings as the law has led to shrinkage of income since the institutions cannot price loans using their own margins as was in the past," said Henry Wandera, an economics lecturer.
"If the law is not repealed as banks are pushing, the sector may register reduced expansion, which means less jobs and less circulation of money in the economy," Wandera said.
Amid the decline in profit, Kenyan banks have resorted to several measures aimed at increasing efficiency in response to the challenging operating environment.
They include staff layoffs, closure of branches, reviewing operating hours for some branches, or outright sale in the case of small banks.
Some 2,000 employees from 11 banks have lost their jobs as the institutions restructure operations and embrace internet and mobile banking.
Out of at least eight banks that have declared their financial results in the last week, seven registered declined profits, mainly blamed on the interest ceilings intended to boost access to credit, especially among small businesses.
Among the affected lenders are Barclays Bank, NIC Bank, Kenya Commercial Bank, Stanbic Bank, Diamond Trust Bank, Equity Bank and Standard Chartered Bank.
The banks recorded decline in interest income mainly due to reduced lending, which hurt their overall income.
NIC Bank's financial statement released on Tuesday shows that total operating income declined by 19 percent to 98 million U.S. dollars, from 122 million dollars.
Interest income fell to 121 million dollars, from 147 million dollars.
"The decline is attributable to a 16.1 percent decline in interest income on loans and advances to 88 million dollars from 110 million dollars, despite an increase in interest income on government securities by 14.3 percent," the bank said.
A similar scenario was recorded by Barclays Bank, whose interest income declined by 5 percent in the first nine months of the year to 188 million dollars, from 204 million dollars of the same period in 2016.
This was despite the loan book recording a 5.3 percent growth, implying that the decline was an effect of the interest-rate cap.
For Stanbic Bank, its results indicated that its profit before tax decreased by 17.4 percent to 3.8 million dollars, from 5 million dollars in the same period last year, driven by a 7.6 percent increase in operating expenses amid low income.
Interest income decreased by 7.3 percent to 120 million dollars, from 130 million dollars in a similar period in 2016.
This was attributable to low income from loans and advances and a drop in earnings from government securities.
"The average decline in core earnings across the banking sector stood at 6.5 percent, owing to the tough operating environment as a result of the interest rate caps and political uncertainty in the country that affected the business environment," said analysts at Cytonn, a Nairobi-based investment firm.
Most banks have shifted to government securities, with lending to the government by all the 17 reporting banks going up to 608 million dollars in the period.
Investment in government securities has grown by 16 percent, outpacing loan growth of 6.3 percent, showing increased lending to the government by banks as they avoid risky borrowers, noted Cytonn.
The east African nation introduced the law to cap interest rates in the third quarter of 2016, with the move aimed at deepening access to credit especially among small borrowers.
The rates were capped at 4 percent above the Central Bank rate, which was last week retained at 10 percent.
Commercial banks, therefore, are currently charging borrowers a maximum of 14 percent, down from between 18 and 28 percent.
"Commercial banks are reeling from the effects of the reduced earnings as the law has led to shrinkage of income since the institutions cannot price loans using their own margins as was in the past," said Henry Wandera, an economics lecturer.
"If the law is not repealed as banks are pushing, the sector may register reduced expansion, which means less jobs and less circulation of money in the economy," Wandera said.
Amid the decline in profit, Kenyan banks have resorted to several measures aimed at increasing efficiency in response to the challenging operating environment.
They include staff layoffs, closure of branches, reviewing operating hours for some branches, or outright sale in the case of small banks.
Some 2,000 employees from 11 banks have lost their jobs as the institutions restructure operations and embrace internet and mobile banking.
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