14 September 2017

Kenya's Central Bank Sets Stage for Repeal of Interest Rate Caps

The Central Bank of Kenya (CBK) Wednesday gave the clearest signal that it intends to push for a repeal of the year-old law capping interest rates because of the negative effect it has had on the economy.

CBK governor Patrick Njoroge, however, warned that commercial banks will have to be more disciplined in the pricing of loans so as not to overcharge borrowers.

"What needs to change is the discipline among lending institutions. They cannot go ahead setting interest rates the way they were doing before. And it is our job to deal with them in the context of that market discipline," he said.

Dr Njoroge said preliminary findings of a joint study with the Treasury on the impact of the rates capping on growth of credit had confirmed a negative impact.

Parliament passed the law late last year, meaning it can only be repealed by the same institution.

The Banking (Amendment) Act, 2016, which came into force on September 14 last year, caps loan charges at four percentage points above the Central Bank Rate(CBR), presently standing at 10 per cent, and requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.

"I think it is clear to us that this (rate cap) has been problematic in many ways. What I cannot tell you is the path going forward (and) how this will happen," Dr Njoroge said.

"All I can tell you is that it is in our interest as a country. It is in our interest as a central bank to work to reverse these measures and go back to a regime where interest rates are freely determined, but in a disciplined environment, Dr Njoroge said.

Review of the rate cap

He added that the central bank was keen on maintaining that disciplined environment.

Barclays Bank of Kenya chief executive Jeremy Awori said review of the rate cap, if agreed, can only happen next year, citing the prolonged electioneering period after the Supreme Court voided the re-election of President Uhuru Kenyatta.

"This is a process because it has to go back to Parliament for action. What I can say is that the banking industry is keen not to return to the days when we had runaway interest rates," Mr Awori said.

"I don't think this is healthy for anybody. We really need to try and keep interest rates as affordable as possible."

Mr Kenyatta, who will face off with National Super Alliance's candidate Raila Odinga in fresh polls on October 17, had on March 15 directed the CBK and the Treasury to study the impact the rate cap has had on access to affordable credit by small and medium-sized enterprises.

"That (study) has progressed and we have some preliminary data, which we may share next week. I am not sure they will be ready to be kicked around by yourselves (journalists), but I think we are getting there. Again, if we miss it by a day (or) a month, I hope we can understand each other," Dr Njoroge said.

'Blacklist'

Mr Kenyatta signed into law the Banking (Amendment) Act 2016 at a time when the average interest rate stood above 18 per cent, a level seen as unaffordable for the dominant SMEs.

Dr Njoroge said Credit Reference Bureaus will also be restructured and strengthened based on findings of past studies so they are not seen as a "blacklist" by borrowers, but rather a tool to that enables borrowers to get better rates based on their credit history.

Dr Njoroge said lenders will also have to review how they price risks by looking at individual borrowers and the projects to be funded.

Growth in credit to the private sector slowed to 2.1 per cent in May compared over 17 per cent in December 2015, the CBK data showed in July.

Kenya

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