Kenya: MPs Oppose Interest Rate Cap Repeal

9 September 2019

A parliamentary committee has opposed a proposal by National Treasury to have the interest rate capping law repealed saying it will subject Kenyans to expensive credit at the expense of commercial banks, a majority of them multinationals.

The proposal to amend section 33 (b) of the Banking Act, is contained in the Finance Bill 2019, currently before the National Assembly.

At a meeting with acting National Treasury Cabinet Secretary Ukur Yattani, his Principal Secretary Dr Julius Muia and officers from Kenya Revenue Authority (KRA), to consider the bill, members of the Finance and National Planning Committee of the National Assembly opposed the move saying it will make bank loans expensive.

CAPPING

Mr Yattani had told the committee chaired by Kipkelion East MP Joseph Limo that the capping of the interest caps had denied the SMES loan facilities as commercial banks prefer loaning the government because it is less risky.

"The noble move of capping the interest rates has not worked. The controls have had serious effects on the credit to the SMES, a concern for policy makers as it has curtailed borrowing," Mr Ukur said noting that the effects of caps have seen banks increase lending to the government.

"It is time to review this. The interest rate caps must be removed," he said.

After caps were introduced, according to the CS, private sector credit reduced by four per cent from 76.8 per cent as lending to the government increased by 2.3 percent from 19.9 per cent.

But MPs Samuel Atandi (Alego Usonga), Ndirangu Waihenya (Roy Sambu), David Mboni (Kitui Rural), Christopher Omulele and Mr Limo said they will not have the people they represent subjected to expensive credit so that commercial banks can make abnormal profits and have it repatriated to their mother countries.

GIVE CREDIT

"I disagree with you. The banks decide who to give credit to. The removal of interest caps will only benefit few shareholders and encourage capital flight," Mr Atandi said.

Mr Atandi wondered why Treasury was so keen on the matter and whether it is "speaking for the banks that failed to convince us to have the caps removed."

At some point, Mr Atandi advised the government to stop borrowing from local banks saying it has made the cost of credit so high to the SMES.

"Make banks lose the alternative by avoiding borrowing from them and have KRA aggressively involved in collecting taxes to finance the budget," he said.

Mr Limo advised Treasury to consider the route of differentiated interest rates- amending the law to have the rates applied based on the risk they are likely to portend.

LOWER CADRE

"We could think of segmenting the rates into high and low risks among others, and apply the rates appropriately but progressively," Mr Limo, who noted the caps exist to cushion the lower cadre borrowers, said.

In 2016, the Banking Act was amended to introduce the interest rate caps limiting borrowing rates to four percent above the Central Bank of Kenya Rate and a floor of 70 percent of the reference rate imposed. In 2018, the floor was removed through the Finance Act.

The Institute of Public Accounts of Kenya, Kenya Private Sector Alliance and the Law Society of Kenya among others, have also opposed removal of caps as Treasury, Central Bank of Kenya and the Kenya Bankers Association try to push through. ends

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