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Equity Bank to stop offering salary loans
What you need to know:
- New standards. The bank is cutting down unsecured and micro loans to comply with a new set of global accounting rules on loan loss covers.
Nairobi.
Salaried workers and owners of small businesses are headed for tough times after Equity Bank announced it is cutting down unsecured and micro loans to comply with a new set of global accounting rules on loan loss covers.
Equity group chief executive James Mwangi said the lender was moving away from unsecured and small business loans — which are deemed risky — ahead of the coming into force of the new guidelines, technically referred to as International Financial Reporting Standard (IFRS) 9.
The new guidelines are meant to come into force on January 1, 2018.
The new accounting standards require banks to make higher loan loss provisions to withstand any possible shocks, which Equity reckons is unprofitable under the current interest rate capping regime that has narrowed lending margins.
“We are moving away from unsecured lending. IFRS 9 requires you to use historical ratio to make provisions at point of booking the loan. This is not sustainable with a margin of seven per cent,” Mr Mwangi told an investor briefing on Tuesday.
Equity, which is Kenya’s biggest bank by customer numbers with a client base of 11.7m, announced a 7.4 drop in net profit.
Growth of credit to the private sector fell further to 2.1 per cent over the 12 months to May 2017, according to CBK data, blamed on the rate caps and pre-election jitters.
“Commercial banks’ lending to micro, small and medium enterprises (MSMEs) fell by an estimated 5.7 per cent between August 2016 and April 2017,” Cental Bank of Kenya governor Patrick Njoroge said in May.
Equity has traditionally focused on micro-enterprises and low-income earners to grow volumes and overtake giants such as Barclays and StanChart, who previously dominated Kenya’s banking scene.
Change in strategy
Mr Mwangi attributed the change in strategy to the 25.6 per cent decrease in the size of Equity’s micro-enterprises loan book to Shs11.6 billion in the half-year period to June 2017 compared to KShs15.6 billion in a similar period last year.
The ratio of toxic loans under the micro-segment remained the highest at 13.2 per cent from 11 per cent in June 2016.
“There is a decline in micro loan book. With the loss ratio, it means we are not pricing risk,” Mr Mwangi said.
Equity’s consumer lending loan book contracted 5.34 per cent in the six-month period to KShs56.7 billion. The volume of bad loans in this category jumped to seven per cent from 5.9 per cent in the period under review.
The two segments account for a quarter or 25.77 per cent of Equity’s loan book, which stood at KShs265 billion as at June 2017.
Equity’s change in strategy defies the segments that helped transform the former building society into one of Kenya’s biggest lenders.
Analysts at Standard Investment Bank said that Equity’s change in lending strategy will slow down loan book growth and may hurt returns.
“We do not expect any ramp-up in lending in second half. At start of the year, management had forecast full-year group loan book growth of five per cent, a significant drop from realised five-year average loan growth of 24.4 per cent,” SIB said in a research note.
Effective September 14, 2016 loan interest rates were capped at 400 basis points above the signal rate – currently at 10 per cent - and deposit rates at a floor of 70 per cent of the Central Bank’s rate – This results in an interest margin of seven per cent.
IFRS 9 rules demand that banks project possible toxic loans for the next 12 months and make provisions. This is a departure from the current system where impairments are made in a phased approach after a loan becomes non-performing.
