Kenyans to get cheaper loans as Uhuru signs Banking law

President Uhuru Kenyatta signing into law the Banking (Amendment) Bill, 2015 at State House, Nairobi. Looking on are Deputy President William Ruto, Attorney General Prof. Githu Muigai, Cabinet Secretary for Treasury Henry Rotich, Central Bank Governor Patrick Njoroge, Central Bank Deputy Governor Sheila M'Mbijjewe, Permanent Secretary Treasury Kamau Thugge, and Solicitor General Njee Muturi. 20160824-3 President Uhuru Kenyatta signing into law the Banking (Amendment) Bill, 2015 at State House, Nairobi. (PHOTO: COURTESY)

Lending rates will fall by more than a third after the enactment of a new law that seeks to slash the cost of credit, while handing savers better returns.

Once the new law becomes operational, banks are allowed to charge a maximum of 14.5 per cent on loans, down
from over 20 per cent. This comes into play after President Uhuru Kenyatta signed into law proposals by the National Assembly meant to protect frustrated borrowers who have been at the mercy of lenders. He defied threats from bankers and economists of harmful consequences of the law, promising to deal with the repercussions as they come.

Uhuru said in a statement issued yesterday that he had "consulted widely" before giving his assent to the amendments passed by the National Assembly last month.

"Since receiving this Bill, I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks," said Uhuru.

He added that the frustrations suffered by ordinary citizens were tied to the high cost of credit and low returns on savings.

"I share these concerns," the President said in agreement with millions of ordinary Kenyans, in reference to the low returns paid to savers on their "hard-earned deposits".

Opposition leader Raila Odinga commended President Kenyatta for taking the bold move and heeding advice of the majority of Kenyans who have been choking under huge debts from banks owing to prohibitive interest rates.

"This a good move that works in the best interest of majority of Kenyans.

"I was worried when the President took long to assent to the Bill after my personal advice and those of experts but I say kudos to the bold move," said Raila moments after the Bill was signed into an Act of Parliament.

While congratulating Uhuru, Raila described his step as a patriotic move that should have been implemented by previous regimes, and which will go a long way in alleviating the suffering wananchi have been subjected to.

Raila argued the economy was grinding to a halt, with a high number of defaulters reported while banks raked in super profits.

"Many borrowers are choking with loan arrears and accumulated interest charges because of high costs of lending, and that is bad for the economy," added Raila.

And soon after the enactment of the laws, bankers said they would comply, even though they had reservations about the scope of the amendments in addressing the real causes of expensive credit.

"Meanwhile, the banks will comply with the law as they continue to provide financial services to their customers," the Kenya Bankers Association said, assuring of the anticipated relief to borrowers and savers.

Arising from the new law, and once the law takes effect, savers will be assured of earning 7.35 per cent interest on deposits, way above the current range of between 1.42 per cent and four per cent.

Uhuru chose to disregard calls by his principal advisers in the financial sector, National Treasury Cabinet Secretary Henry Rotich and Central Bank of Kenya Governor Patrick Njoroge, who had earlier pleaded with him not to sign the Bill into law.

Both have concurred that banks were too greedy in their operations at the expense of their customers, but advocated for alternative measures to address the asymmetry on saving and borrowing rates.

Only last Friday, Mr Rotich warned there would be unintended damaging consequences of capping interest rates. But he was quick to add there was scope for banks to slash their lending rates.

"Banks should be making some decent profits like any other business, that is why we are saying there is scope for them to lower interest rates," said Rotich.

At the time, Dr Njoroge, the CBK boss, too termed the legislation as harmful to the economy, citing it could precipitate capital flight from the country.

It is clear Uhuru has opted to deal with the consequences.

"We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms," said the President of the cautionary counsel presented to him by both Rotich and Njoroge.

Dr Njoroge, a top economist, stands for a voluntary lending rate cut by banks, even repeatedly calling banking executives to round-table meetings and pleading with them to conform.

It will be the first time after two attempts by MPs to legislate lending rates that the President has automatically approved the Bill.

Former President Daniel arap Moi also signed into law similar amendments in 2000 brought by then Gem MP Joe Donde, but banks would later challenge the enforcement of the Act on a technicality relating to the assenting and operational dates.

The envisaged operational date as captured in the drafting of the Donde Bill was before President Moi signed the Bill to law. A judge ruled that the law was defective since the operational date fell before the amendments were approved by the president.

In principle, Presidents Moi and Uhuru are in agreement. But in the present attempt, Uhuru has qualified his decision by referring to the unfulfilled promises made in the past by banks when faced with similar threats of regulating rates.

"In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates," read the President's statement.

Despite past promises, commercial banks have continued to rake in huge profits.

Banks reported a cumulative pre-tax profit of Sh134 billion last year, according to official data, and could be on course to exceed the amount in 2016. But with the new laws, these super profits are likely to take a direct hit and banks will have to leave with a fraction of these earnings.

Enactment of the law yesterday would cement the place of the Bill's sponsor and Kiambu Town MP, Jude Njomo, in legislative history, as it did for Mr Donde, considering the anticipated benefits to the common citizen.