Banking amendment act signed by the president will regulate applicable rates to banks loans and deposits thereby capping the interest that banks can charge on loans and deposits.The banking amendment act will affect the stakeholder in the banking industry as outlined below.
To the borrower
- The credit worthy borrowers can access more funds at a reasonable rate (At most 14.5%). This implies more money in circulation in the economy which may lead to systematic increase in inflation especially if the money is not used in tangible investments. This may lead to a decrease in value of the Ksh. causing the CBK to intervene and consequently raise the CBR (Base lending rate (Currently 10.5%)).The market however will self-correct,
- The credit worth borrowers who end up defaulting are not exposed to high penalty rates compare to the Pre-amendment period.
- Their clients have access to credit and therefore the time lag to complete a sale(s) reduces. This means increased sales/revenue in the short run however, the market should self-correct over time.
- The margin on fixed deposits will reduce significantly however a minimum return on deposits pegged at 70% of the CBR should be attractive.
For the Bank
- Surge in loan applications in the medium term.
- Reduced default rate/bad loans subject to applicable screening criteria for loan application
- Decrease in return on equity for the banks may lead investors to consider other investment vehicles.
© Patrick Gatere 2016, Contributor; Nahashon Meli, Published by Marvin.co.ke/blog