May-June-issue

COVER STORY
banks appear to have gotten stuck in the
initial mourning phase, denial of the new
reality.
Unlike Mary Magdalene and other
women who kept watch on Jesus’ grave
who harkened to the angels’ advice to
the effect that the Son of man had arisen
and was on his way to Jerusalem, our
financial institutions have continued to
ignore voters representatives’ voice to the
effect that the lending ecosystem changed
from the effective date of the legislation.
Instead, banks continue to keep watch
on the ‘graves’ of the old lending model
of uncontrolled and at times usurious
lending rates, where lenders unashamedly
reported billions in after tax profits on
the graves of their borrowers’ enterprises
and job losses. The ugly side of unbridled
greed for profits at any cost!
Re-inventing the law of
demand and supply
Economics theory and
Business Studies 101
teaches us the inverse
relationship between
demand and supply
and the implications
on price. Simply
put: other things
being equal, (ceteris
paribus), the higher
the supply, the
lower the price, and
the lower the supply,
the higher the
price. The higher the
demand, the higher
the price and vice versa.
Similarly, when the price
of a good or service is
reduced, we should expect
an upsurge in demand given
that what was out of reach to some
potential consumers automatically
becomes affordable.
Banks act as intermediaries between
resource surplus and deficit units, that is,
savers and borrowers. The interest rate on
loans is the price borrowers pay to access
funds belonging to third parties, whereas
deposit rate is the price paid to savers
by regulated deposit taking financial
institutions. Banks earn their commission
by optimizing the spread between deposit
rates and lending rates. It is the obscene
spread in the Kenyan market compared
with other markets that prompted the
people’s representatives to intervene and
tame the ‘invincible’ hand from running
amok, leaving in its path many devastated
entrepreneurs’ dreams and careers.
Curiously, the aftermath of the
interest rate capping has led to what is
called, ‘undesirable’ outcomes. Banks
that used to aggressively ‘hawk’ loans
on pavements, bars, weddings, funerals
and churches have all of a sudden ‘seen’
the light and realized that majority of
the Kenyan borrowers are too risky to
lend at 14 % per annum. Consequently,
lending to the private sector, the primary
drivers of economic growth has slowed
down. The Central Bank of Kenya, IMF,
World Bank, National Treasury, and
some Economic Analysts, who never
supported the rate cap in the first place
are the loudest in lamentations. As
expected, all banks have found a perfect
excuse to explain their reduced billions in
profits and subsequent retrenchment of
hundreds of employees, all attributable to
the rates control. They should get a FREE
copy of my latest book, “My Excuses: The
Barriers to Dreams and Success”.
Something is not adding up, and the
sooner we call off the bluff the better for
our economy and the banking industry.
If the price of money to the borrowers
has come down from the pre-capping
levels of 18-22% p.a. to post cap rate
of 14% p.a., in normal circumstances
you would expect the demand for credit
to sky rocket. In loan appraisal, all
those businesses that were marginally
profitable and viable credit risk at precap
rates automatically become very
attractive borrowers. In other words, the
internal rate of return (IRR) becomes
very attractive at 14% p.a. Individuals
and businesses are able to service their
facilities within shorter timeframes, the
so called payback period. Everybody is
better off in the new dispensation, i.e.
other things being equal, loan default
goes down and banks make more profits
arising from reduced provisions.
In the same vein, being a major
cost driver in enterprises, interest rate
reduction would lead to a dramatic
fall in business operating expenses.
Hence, the interest rate cap in
fourth quarter of 2016 would
ordinarily have resulted in
enhanced profitability.
Enterprises that could
not qualify for loans
at 18-22% for being
unprofitable, by the
stroke of a pen, turned
profitable at 14 %.
This is pure common
sense.
Given the foregoing,
one would be forgiven
for being totally lost
in the wilderness of the
“queer” Kenyan business
environment where the
laws of demand and supply
do not apply in lending!
Kenyan banks want to re-invent
the foundational Economics Law
of demand and supply as it relates to
lending. Why do I say so?
1. Why would the banks and their
sympathizers reportedly claim there is
reduced demand for credit when the
price has come down? Has credit all of
a sudden become a ‘snobbish’ good that
defies the law of demand and supply (i.e.
snobbish goods are those whose demand
is positively correlated with price. Beloved
of the wealthy, high price is taken as a
sign of class, quality and exclusivity).
2. Why would the potential borrowers
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