Are the majority of Kenyan borrowers too risky to lend at 14% per annum?
It appears from press reports and the advisory opinions from diverse professional analysts as well as leading international agencies, that the issue of interest rate capping effected in September 2016 is not about to end. Interestingly, it is the banks, the regulator and ‘proponents’ of free markets who continue to stoke the fires, ensuring that the matter never dies. Unlike the petroleum subsector which got used to price controls and moved on, it looks like our banks are still living in denial. There is no doubt says the author of this intriguing feature, which is our cover story, that local banks were in utter shock after losing their ‘beloved, cash cow’, the critical revenue driver - interest income.
Besides, instead of allowing the natural mourning process to take place, our banks appear to have gotten stuck in the initial mourning phase; denial of the new reality. 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 the majority of 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 question is; why would the banks and their sympathizers reportedly claim there is reduced demand for credit when the price has come down? Users of financial information are increasingly demanding transparency in financial reporting, especially in an environment where companies are in financial distress. Financial analysts and stakeholders are now focusing more on (among other things) assessing an entity’s ability to honor its obligations, as and when they fall due.
The accounting standards - setting body, in response to these changes, has issued amendments and new accounting standards aimed at ensuring transparency and fair presentation of financial statements. One such standard is the Accounting Standard on leases, (IFRS 16) issued in 2016 to provide principles on accounting for leases. Find out why you should understand the new standard in financial reporting and assurance under the heading - A transparent balance sheet. If you decide to venture into private practice as an accountant or advocate, you will realize that there are limited resource materials that can teach you how to start a firm, manage the firm, source for clients, or most importantly, educate you on business negotiation skills.
Our education system lays emphasis on imparting knowledge on how to work for an existing business but does not prepare one to start and run a business or a firm. The dream of most accountants in private practice is to start their own small or medium size audit firm. These accountants have the necessary skills, knowledge and experience to handle clients. But all this does not guarantee success in your private practice.