Boon for Credit Unions following Repeal of Rates Cap Law

Savings and Credit Co-operative Societies (SACCOs) are expected to have a more competitive edge over commercial banks in the credit market. This follows the recent repeal of the Rate Caps Law, allowing commercial banks to review their rates upwards.

For Saccos, removal of Rate Caps law portends more retail deposits as they traditionally offer better savings rates than commercial banks. Before the rates cap, Saccos offered from 4% in savings compared to less than 2% by banks. On lending, higher deposits motivate more borrowing from Saccos which because of competition and member based decision making, cannot review their rates significantly upwards.

Mr. Peter Munaita, Chairman of Nation Sacco Society Limited.

He, however, added that for illiquid SACCOs which borrow from commercial banks to lend to members, these would be hard hit if bank credit lines become more expensive.

Saccos have traditionally been the lower cost route in terms of loan rates at about 12%. With the caps, banks were within SACCOs league in lending rates. Now that caps have been removed, banks are expected to move lending rates higher ideally meaning Saccos will once again be competitive in loan rates.

Gerald Muriuki, Analyst at Genghis Capital Limited

The Finance Bill, 2019 was signed into law on 7^th November, 2019, repealing section 33B of the Banking Act which provided for the capping of interest rates at 4% above the Central Bank Rate.

The President’s decision to repeal the interest rate cap was on the back of reduction of Credit to the private sector, particularly the Micro, Small and Medium Enterprises (MSMEs).

Figures indicate that in the first year following the introduction of the interest rate cap, the stock of credit to MSMEs declined sharply by 10% y/y on account of difficulty for banks to price the SMEs within the set margins, as they were perceived “risky borrowers”.

According to Mr. Munaita, Banks could grow business through credit lines with micro-finance banks which on lend to SMEs at rates above 20%.

“In the pre- rate cap era, these rates were on average at 25% with some extremes at 30% plus,” said Mr Munaita.

He is still pessimistic over what repeal of the rate cap law will do in terms of enabling small business access credit.

“To what extent lending to SMEs and individuals will grow is up in the air. For SMEs, the real constraint is lack of bankable proposals rather than cost of credit. For households, digital lending at usury rates has proven lucrative for all lenders. This unsecured segment will grow exponentially, despite it being very expensive and risky,” said Munaita.