The ripples from the bank collapses of a few months ago barely subsided before Parliament passed the interest rate regulation Bill.
Setting a floor and ceiling to the cost of money, the law is already affecting the financial sector, and will continue to do so. Without a reputable, efficient and effective financial sector Vision 2030 will turn out to be Fantasy 2030, so what comes next is crucial.
With new directors of the Central Bank of Kenya in place to act as unbiased advisers, perhaps this is a good time for governor Patrick Njoroge to reflect on redefining and improving on the intent of the original Bill. Bankers also need to look beyond the immediate to new strategies.
In previous articles, I (and others) have discussed the distortions such a law will cause, many of those predictions already apparent. But distortion is not always a negative.
It catalyses innovation, on the part of producers and (one hopes) regulators. It also changes the behaviour of consumers, creating niches and killing off unsustainable models.
A lower cost of bank capital for the biggest firms will strengthen the sector overall. For bigger and more creditworthy firms, sophisticated borrowing means banks’ internal risk assessment and product development should improve.
Staff will be better skilled, and in the long run banks will merge to drive down non-interest costs, consolidating into larger and stronger banks.
Further, the misconception that SME financing must suffer with thinner interest spreads. I suggest we differentiate type of capital from amount of capital.
SMEs that need Off-Balance Sheet support, that is, discounting, factoring, trade finance and asset-backed lending don’t need cash loans.
This isn’t addressed by the bill, but it is now in banks’ interest to provide non-debt capital and to earn OBS service fees rather than interest.
Technology-driven mobile and e-lending could become ever more attractive, and better refined since it offers cheaper distribution and more immediate collection methods.
As they expand, they get larger and ‘pool’ retail credit risks. These pools are more creditworthy on an aggregate basis, thus lowering their cost of capital, and could pass this on to their borrowers. Particularly if they are allowed to issue wholesale securities to back their fundraising.
All this innovation comes with severe risks if regulators do not keep an eye on the players involved, the structures created to pool risks and the debt securities that become created or traded.
We will also need to do detailed changes to loan-loss levels, provisioning rules, capital allocation and security requirements to fit into a regime of capped interest costs, as deliberately forcing down the real interest rate in a high-inflation economy can go wrong and unleash more problems than high interest rates ever caused.
Mr Dave of Riverside Capital Advisory works with investment banks and private capital firms in Africa and other emerging markets.