Proposed banking law aims to cap lending rates in Kenya

Minority Chief Whip Jakoyo Midiwo has proposed new legislation that is expected to place a cap on lending rates in amendments that could have huge implications for the banking sector.

The proposals that also seek to introduce a minimum interest paid to depositors are likely to spark sharp resistance from bankers.

Mr Midiwo first talked about the amendments to the Banking Act in a press conference in Kisumu yesterday.

This will be the second time that Parliament is making a go at taming commercial banks after a flopped bid by former MP Joe Donde 15 years ago.

“The maximum interest rate that a bank or a chargeable a financial institution may charge for a loan or monetary advance shall not exceed by more than three per centum, the rate set and published the Monetary Policy Committee established under section 4D of the Central Bank of Kenya Act,” the proposals read in part.

The amendments will be taken to Parliament next week, paving the way for debate and possible enactment.

Steep rise

Midiwo’s proposals come in the wake of a steep rise in interest rates in the last three months that has seen lending rates nearly double to a peak of 30 per cent.

If the proposals are accepted, commercial banks would be required to limit their lending rates to a maximum of three per cent on top of the benchmark lending rates, prescribed by the Central Bank of Kenya.

Depositors would be entitled to a minimum 70 per cent of the benchmark interest rate. Kenya’s indicative rate is set by the CBK at 11.5 per cent, which translates to a maximum lending rate of 14.5 per cent, while banks would have to pay a minimum of 8.05 per cent.

Past efforts by the CBK to regulate lending and deposit rates have largely been ignored by commercial banks.

Average deposit rates in the market are 6.91 per cent, having climbed in the recent weeks to reflect the tightening monetary policy.

CBK also reports that the average lending rates in the market are at 15.68 per cent – but have not been adjusted to show the latest round of rate hikes.

Our sister publication, The Standard, carried the story of the pain among borrowers yesterday. Most of the people who shared their frustrations reported that their banks had notified them of a second rate increase in three months.