Kenyan MPs, Executive, Banks Differ Over Rate Caps

Kenyan lawmakers are headed on a collision course with the Executive over bank lending rates, after President Uhuru Kenyatta rejected their push to control the cost of loans in the country.

In 2016, President Kenyatta signed into law the Banking (Amendment) Act 2016 that introduced interest rate controls to cushion borrowers from exorbitant rates charged by lenders, with a view to growing the economy through increased credit to the private sector.

However, last week the President refused to assent to the Finance Bill (2019), which MPs had amended to retain lending rates at four percentage points above the prevailing Central Bank Rate (CBR).

Members of parliament now require to marshal a two-thirds majority to overturn the President's memorandum when they resume their sessions on October 29 after a 10-day recess from October 18 to October 28.

In March this year, the High Court ruled that the rate cap law was unconstitutional.

The court gave parliamentarians 12 months to reconsider their positions on the provisions of the Banking (Amendment) Act No 25 of 2016, which introduced Section 33B into the Banking Act (Cap 488 of the Laws of Kenya) that capped lending rates.

Repeal of the interest rate cap

Analysts at AIB Capital say the MPs could either amend the Finance Bill and remove the caps, pass the Bill a second time without amendments -- which requires a two third majority of the house--or amend the Bill and increase the cap from four percentage points, giving banks a higher profit margin.

According to the Kenya Bankers Association (KBA), the memorandum asking Parliament to support a repeal of the interest rate cap provides for further engagement to make credit more accessible to borrowers, especially the micro, small and medium-sized Enterprises (MSMEs) that have been adversely affected by the legislation.

"Over the past three years, both industry and government policymakers have monitored the impact of the interest rate cap with the majority of stakeholders, concurring that the law was well intentioned but has resulted in unintended consequences, including a reallocation of capital from where it is needed most," said Joshua Oigara, the chairman of KBA.

He said that lending has reduced by more than 1.2 million accounts, and the size of loans has increased by 47 per cent, implying that those who had loans are borrowing more while those whom the law was intended for are forced to seek expensive and informal lending channels or shylocks.

Public exploited

The MPs say that if the rate caps are removed, banks will exploit the public and the interest rate will go up to 25 per cent.

The parliamentarians also say the reason for the decline in private sector credit growth is the government's excessive borrowing from the domestic market.

If the rate caps are removed, Kenyan borrowers may be left at the mercy of banks, which will could set lending rates at will depending on their own risk assessment of customers, leading to growth in their interest income that has dropped.

Currently banks have shunned lending to the private sector particularly to MSMEs, which they consider high risk, and channelled their funds to risk free government securities.

Banks, the Treasury, Central Bank and international financiers such as the International Monetary Fund and the World bank have strongly opposed interest rate caps.

The amendments to the Banking Act were introduced by Kiambu Central MP Jude Njomo through a Private Member's Bill that was signed into law in August 2016.

The law came into force on September 14, 2016, sparking a dispute by banks that said they were unable to price in risk in their customer loans.

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