KENYA
Kenya crushing its banks
Following years of political turmoil , Côte d ’ Ivoire is growing quickly and attracting investment . Now , the government is trying to position the country as west Africa ’ s technology and start-up hub .
KENYA ' S SEVEN BIGGEST LENDERS ( THERE ARE ABOUT 43 IN TOTAL ) HOLD 80 PERCENT OF THE BANKING SYSTEM ' S CASH
The frontier market of Kenya isn ' t often on U . S . or European investors ' radar . It should be . It offers a timely reminder of financial markets ' complacency about the risk of populism ; and the attractiveness of bashing banks to win votes .
East Africa ' s most advanced economy has introduced a law setting a cap on commercial lending rates and a floor on deposit payout rates , an instant squeeze on margins that sent shares of Kenyan banks to their lowest in years . Investors were clearly unprepared for a measure designed to make banks poorer -- or less greedy , depending on your point of view -- in the face of what Kenyan President Uhuru Kenyatta described as ordinary citizens ' frustrations about the cost of credit and earnings from deposits .
Kenya Crush
Bank stocks have plunged since the announcement of a law to cap lending interest rates There ' s no denying Kenyan banks make rich returns . The country ' s largest bank by assets , KCB , has a return on equity of 24.7 percent , according to Bloomberg data , while rivals Cooperative Bank and Equity Group are on 24.5 percent and 26.9 percent respectively . That ' s not just leagues ahead of the 5-7 percent ROE at Europe ' s biggest banks , it beats the 15-18 percent at South Africa ' s top lenders . Market concentration may have something to do with it : Kenya ' s seven biggest lenders ( there are about 43 in total ) hold 80 percent of the banking system ' s cash . But capping interest rates risks damaging the Kenyan economy and stunting credit growth , a danger not lost on officials at the country ' s central bank and finance ministry , who opposed the measure . If banks stop catering to anyone but the safest credit risk , it may encourage shadow banks or dodgy lenders to step in . If smaller banks find it harder to make ends meet , they may get bought up , making those dominant banks even bigger . And the new loan cap , at 4 percentage points above the base central bank rate , sets a potentially " unreasonable " ceiling for Kenya ' s risk premium , according to investment firm Cytonn .
So why take such a chance ? Well , next year ' s election and a bank-bashing law may be just the ticket to win votes . Some analysts reckon it ' s a purely populist move .
Yet the sell-off of Kenyan bank stocks over the past month suggests markets weren ' t adequately prepared for this risk , with the chorus of credible dissenting voices perhaps lulling investors . And while it ' s easy to dismiss this as the kind of problem specific to emerging markets , there are echoes of the anti-elite vibe in Europe and the U . S .
Championing the banks , in particular , isn ' t much of a vote winner . The U . S . election has put the restoration of Glass-Steagall back on the table , with Republicans calling for big banks to be broken up . British chancellor Philip Hammond is trying to put a protective arm around the City of London by exploring continued access to Europe ' s single market , but he ' s clashing with the crowd-pleasing instincts of the " three Brexiteers ", Boris Johnson , Liam Fox and David Davis .
There ' s still hope that pragmatism will prevail . Calls for a restoration of Glass-Steagall look like posturing , while Moody ' s reckons that even if the U . K . quit the single market , its finance firms could probably still do plenty of business in the EU .
Yet the Kenya experience shows the potential for nasty surprises in a populist age , whether self-harming or not . Don ' t forget that Brexit itself caught investors on the hop . - Bloomberg
28 Business Times Africa | 2016