Sidian Bank became the first lender to welcome the repeal of capped interest while other lenders are on the go-slow mode on the removal of the interest cap. In its new development, the bank informed the public that it will start offering renewed packages particularly for SME financing and that it has come up with risk-based pricing that will offer different interest rates and loan terms to different consumers, based on their creditworthiness as guided in the Banking Sector Charter published by Central Bank of Kenya in 2019.
While the lawmakers adopted the idea with the faith that financial institution will be motivated to lend more to SMEs corporates and Mamamboga, to encourage business growth and expansion that will impact on the Gross Domestic Products positively, the fear of the unknown is gradually materializing into reality.
According to Centum CEO James Mworia, repeal of the interest cap could see a number of businesses looking for capital shifting from banks towards private equity. The fact that banks will begin pricing credit based on risk will propel businesses to seek funding from a number of alternative sources
“After the removal of interest cap for those companies seeking to finance their businesses using debt, that option might very expensive because risk will be totally priced. The pressure for businesses to revise their capital structure and bring in equity is going to increase,” he noted.
Financial Institutions are normally faced with a number of risks which include credit risks, liquidity risks, interest rate risks, operational risks just to mention but a few. The core financial objectives of these institutions are to maximize value and shareholders’ wealth.