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Only President Uhuru now stands between borrowers and low interest rates

By Jacob Ngetich | Updated Fri, July 29th 2016 at 00:00 GMT +3
The Banking (Amendment) Bill, 2015 now awaits President Uhuru Kenyatta’s signature

President Uhuru Kenyatta’s signature is the only remaining hurdle to lower interest rates on loans and higher returns for deposits.

Thursday, MPs defied strong lobbying by commercial banks to unanimously pass a Bill that intends to regulate interest rates applicable to bank loans and deposits, and prescribes punitive penalties for bank officials who violate the requirement.

The Banking (Amendment) Bill, 2015, provides that banks shall not charge interest above four per cent of Kenya Banks Reference Rate (KBRR).

It adds that customers will be entitled to interest of up to 70 per cent on their deposits.

"A person shall not enter into an agreement or arrangement to borrow or lend directly or indirectly at an interest rate in excess of that approved by law. A bank or financial institution that contravenes the provision commits an offence and shall be liable to a fine of not less than Sh1 million," reads part of the Bill.

Presently, bank lending rates are linked to KBRR, which is based on averages of the monetary policy rate and the 91-day Treasury bill yield over six months.

Although the current CBK base lending rate is 11.5 per cent, banks are allowed to set their rates based on the risk profile of customers. This has seen interest rates on loans skyrocket to a high of 30 per cent, to the disadvantage of borrowers.

The amendment to the law approved by MPs also stipulates that bank chief executives who violate the new regulations will be imprisoned for terms of not less than one year.

"...In breach, the CEO shall be imprisoned for a term not less than one year," reads the new provision introduced Thursday by the Bill's sponsor, Jude Njomo (Kiambu Town).

"Since we cannot imprison a bank, the CEOs will become responsible. It will avoid a situation where the law is not clear on what is supposed to happen in case the fines are not paid," said Njomo. Yatta MP Francis Mwangangi praised the amendment and noted that in an economy like Kenya's, it did not make sense to see financial institutions declaring profits of over Sh10 billion.

"It is true we need to take a keen interest on the activities of rogue financial institutions. The Central Bank Governor should move fast and ensure that the provisions of this Bill are implemented," said Mwangagi.

Banks have been under a lot of pressure to lower interest rates, with claims that some had run rogue.

"The principal object of this Bill is to provide a mechanism for regulation of banks and financial institutions' rates through the introduction of ceilings. The Bill proposes to put a cap on the rate of interest charged for loans and to fix the minimum rate of interest that such institutions must pay on deposits held," states the Bill.

"There are Kenyans who are suffering. Nairobi is bad, but the countryside is even worse since interest rates are stifling devolution. Banks are here to help create employment, but all the profits businesses are getting are finding their ways bank to the banks," said Deputy Leader of Minority Jakoyo Midiwo (Gem).

"We were under a lot of pressure from the banks, but we categorically told them that we will not go their way," said Iringo Kubai (Igembe Central), a member of the Finance committee.

Other members who spoke Thursday appealed to the President to assent to the Bill.

"This is one of the best things to happen to the banking industry in Kenya," added Emmanuel Wangwe (Navakholo).

When the Bill was brought to the House for debate in February, Majority Leader Aden Duale (Garissa town) threatened to mobilise MPs to raise the two thirds Majority in the House to defeat a Presidential veto if it came to that.

"Low interest rates was one of the issues the Jubilee government promised. It was also in the CORD manifesto. People have been asking why the rates are not coming down. On this, we are ready to go the full hog and even raise the two-thirds majority to defeat any presidential veto," said Duale. Thursday, Central Bank acknowledged the "underlying sentiments" that prompted the action, but cautioned about consequences of a law that intends to regulate interest rates applicable to bank loans and deposits.

"We continue to express concern on the adverse consequences of capping interest rates. This would include inefficiencies in the credit market, credit rationing, promotion of informal lending channels and undermining the effectiveness of monetary policy transmission," said the CBK.

It added: "We will continue to work with the National Assembly, the Government, the banking industry and other stakeholders to find an appropriate solution that sustainably reduces the cost of credit."

Earlier, the Kenya Bankers Association had said it does not support the introduction of a capping on lending rates and determination on the minimum interest payable to depositors.

"At first glance, capping interest rates looks like something that will benefit consumers but it will disadvantage the very consumers it seeks to protect.


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