NAIROBI, Nov 2 (Reuters) - At least half a million small borrowers at Kenya's biggest lender by customers, Equity , have been locked out of credit by an interest rate cap imposed a year ago, the bank's chief executive said on Thursday.
Those affected were mainly small traders and informal sector employees deemed by the bank to be too risky to receive loans at or below the rate cap level, James Mwangi told Reuters.
The cap, imposed in 2016 and which limits commercial rates at 4 percentage points above the central bank rate of 10 percent, was contributing to a slowdown in credit growth and economic activity, the CEO said in an interview in his office.
"Initially we had up to 1.2 million outstanding loans in Kenya. We now have only 700,000. Essentially you have excluded a whole class (of borrowers)," he said.
Non-performing loans in that segment jumped after the rate cap, sending overall bad debts in the industry above 10 percent.
Banks have shifted funds into government securities, which offer the same yield as private sector loans, but at an eighth of the cost of risk, Mwangi said.
Equity, which also operates in Uganda, Tanzania, Rwanda the Democratic Republic of the Congo and South Sudan, increased its holdings in Kenyan government debt 35 percent to 127 billion shillings ($1.23 billion) in the first nine months of this year.
The bank's loan book shrank 2 percent during the period, as interest income fell 15 percent. The decline was offset by a 28 percent jump in non-interest income, leading to flat total revenue in the same period from a year earlier.
Mwangi said he still expected the group to post higher profit for the full year despite the rate cap and Kenya's slower economic growth and political turmoil over a presidential election that was re-run last week.
Kenya accounts for 90 percent of the group's profit.
He attributed the higher forecast to faster growth in Equity's Uganda unit, where profit grew 37 percent in the first nine months of this year to 700 million shillings and which could rise to 1.2 billion shillings by the end of the year.
"We are betting on Uganda because they have accelerated their oil exploitation," he said, adding that Uganda's estimated crude deposits of 6.5 billion barrels would attract investment as the industry develops.
"That type of money passing through Uganda will give the banking industry a lot of opportunity," he said.
Equity was ready for a new international accounting standard that is due to come into force on Jan. 1 and requires lenders to shift their loss models from incurred to expected.
"It may increase our provisions for existing loans by 15-27 percent. The board has resolved it will take a hit on shareholder funds," he said, adding the bank had adequate capital buffers of more than 20 percent of assets.
($1 = 103.6000 Kenyan shillings) (Editing by Edmund Blair)