President Uhuru Kenyatta must apply Solomonic wisdom on interest rates Bill

NAIROBI: The Banking Act (Amendment) Bill presents a dilemma to President Uhuru Kenyatta. There will be consequences whether he assents to it or not.

President Kenyatta’s men in charge of fiscal and monetary policies have opposed the Bill. In their arguments, they believe with little or no evidence, interest rates will climb down by themselves on a “free market economy” paradigm.
Like them, Kenya Bankers Association (KBA), believes capping interest rates will deny credit to “high risk borrowers” who they fear would be lured to the “black market” of shylocks.

The Jubilee administration was elected on the platform of lowering the cost of living. Cost of credit ranks highly among costs of energy, food and transport. That inflation has been surging and now stands at 6.4 per cent beckons the President to contain lending rates.

But what the President is not being told by those opposed to the “Njomo Bill” are several facts — the contextual history, exploitative nature of banks, crocodile tears banks are shedding for borrowers, existing capping precedents and the doublespeak from media editorials.

In 2000, Gem MP Mr Joe Donde introduced the Central Bank of Kenya (Amendment) better known as “Donde Bill” when interest rates averaged 24 per cent.

The lobbying saw President Moi reject it. It was later amended and assented to in August 2001 with an obvious “error” on its commencement date being seven months earlier. A combination of factors least of them a web of corruption and intense lobbying made the law impossible to implement.

Donde’s successor Mr Jakoyo Midiwo, in 2012, proposed a maximum cap on interest rates at no more than 4 per cent above the base rate set by the CBK. It was also defeated.

Then Nairobi Metropolitan minister (and later Finance minister) Mr Njeru Githae told Parliament on March 13, 2012 to pass the Finance Bill 2011 without amendments on capping interest rates.

He pledged restructuring of loans, lengthening loan repayment period, absorption of costs by banks and a halt to further rise in interest rates. He cited a public notice by KBA on December 13, 2011 as the banks undertaking.
The much-touted Kenya Bankers’ Reference Rate (KBRR) as a tool on which banks would transparently price their loans, in the hope to trigger competition, was one of the recommendations from a Cabinet sub-committee chaired by Treasury CS Henry Rotich. I was a member of the committee.

But as it would later emerge, the government was only buying time out of the option of capping rates. It, therefore, didn’t come as a surprise that the National Assembly rallied recently behind Mr Njomo’s Bill to cap the rates.
Since then, opinion is divided among all manner of “experts” and numerous media editorials about the implication of the #CapInterestRates Bill.

When CBK lowers the benchmark lending rate, banks have failed to receive its signals. Major commercial banks have often frustrated the CBK calls and measures to lower the rates.

As a result, access to credit being a key factor defining Kenya’s economic health status remains a challenge despite the countless pledges from the top leadership.

Banks are shedding crocodile tears for “high risk borrowers” who could be locked out. Why? First, the risk is defined by banks.

Second, the issue is not about the ability to borrow. It is about the inability to pay occasioning high default rates, forceful and painful auctions.

Macro-economic policy mandarins at Treasury are failing terribly. The disjointed relationship between fiscal and monetary policies is worrying. Treasury would rather frustrate capping interest rates but hold its billions of public money in banks — in the name of youth, women and other “funds”.

When Treasury consistently competes with “Wanjiku” on borrowing from banks, they simply snub her.
Oblivious to Treasury, when consumers easily borrow and repay loans, they can invest in productive initiatives and drive up job opportunities — lubricating economic engines to roll even better.

Banks adapt lightning speed when adjusting interest rates upwards whenever CBK raises base lending rates. But they adopt the snail speed in lowering them.

That banks have been called “cartels” and “exploitative” by even CBK leadership explains the frustrations MPs had when passing the #CapInterestRates Bill.

While price controls are unsustainable in the long run, they work in the interim (at least with paltry challenges) on the fuel pricing formula adopted by Energy Regulatory Commission (ERC).

President Kenyatta will need to navigate the crossroads by applying Solomonic wisdom. He could sign the Bill as is or decline with a recommendation — banks can be allowed a higher ceiling of say 6 per cent from the recommended 4 per cent.

But to reject any form of capping, Kenyatta will be treading on dangerous grounds — escalating indiscipline in the banking sector as well as his political vulnerability.