Bank Stocks Surge as Rate Cap Repeal Gains Momentum

Tight liquidity could accelerate upward pressure on yieds

Financial stocks at the Nairobi Securities Exchange (NSE) traded surged Wednesday morning after Parliament’s finance committee recommended the removal of the Intrest rate cap.

Analysts from the NCBA Global Markets Research on Tuesday said prospects of rate cap repeal may bolster the appeal of lower duration papers.

“This may favour exposure to lower duration bonds as investors seek to dilute the sensitivity of their bond portfolios to unfavorable shifts in interest rate. Higher demand for short term papers may see the curve
steepen somewhat as yields on the longer-dated papers rise faster than those on the short end,” they noted.

“That said, the central bank’s ability to align the curve to its policy signals will depend on the government’s debt appetite, exchange rate performance and overall market liquidity which may be altered by changes in the supply of credit to the private sector should flexibility in risk pricing be restored.”

On Tuesday, the NSE All-share (NASI) and the NSE20 share indices rose 0.24 and 9.02 points to close the day at 151.67 and 2527.46 points respectively. Volumes traded rose, with 12.9Mn shares exchanging hands against the 9.16Mn shares traded on Monday.

Bank shares have rallied after President Uhuru Kenyatta’s directive to amend the Finance Bill, 2019. Reasons to President Uhuru Kenyatta’s reservation not to assent to the Finance Bill, 2019, in his memorandum, he said, “However, it is apparent that the capping of interest rates has caused unintended effects that are significant and damaging to our economy and in particular, the Micro, Small and Medium Enterprises which are hardest hit.”

The President said capping of interest rates has not addressed the intended objective particularly in expanding credit access. He, therefore, recommended the bill be amended by deleting Clause 45 and substituting, therefore, the following:

  1. The Banking Act is amended by repealing section 33B.

On the other hand, as Parliament begins debate on the Bill, it has said the existing loans should not be affected by the repeal.

“Notwithstanding the repeal of section 33B, any agreement or arrangement to borrow or lend which was made or entered into pursuant to the provisions of section 33B (now repealed), shall continue to be in force on such terms including interest rates, and for the duration specified in the agreement or arrangement,” read the new sub-section of the Banking Act.

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