The banking sector is expected to see mergers and acquisitions (M&A) of third tier lenders in the wake of reduced operational capital following the rate capping law, Genghis Capital researchers have projected.

The rate capping law came into effect in September 2016, limiting interest charges to a maximum of four percentage points above the prevailing Central Bank Rate, currently standing at 10 per cent.

The rates capping law shaved Sh26.3 billion off banks’ lending income in the first six months of the 2017 financial year, setting up the lenders for lower profitability.

“With rate caps some banks will continue to struggle with capital drain which will make it even more difficult to operate,” said Genghis Capital in a new outlook report.

“As a result we might see some tier three banks either being acquired or merging. For State-owned banks consolidation might be a reality.”

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Experts note the interest rate controls have eliminated differentiation in the industry that saw some banks offer loans to riskier borrowers.

With all lenders boxed in to lend within a narrow band, only the most efficient are expected to weather the rate caps by combining scale and cheaper delivery channels.

Some of the merger activity witnessed in the last two years since the rate capping law came into force include the sale of third-tier lender Fidelity Commercial Bank to Mauritian lender SBM Bank, which said then it would pump in Sh1.46 billion.

Kenya has 39 banks, of which eight are classified as tier one, 11 as tier two and 20 as tier three.