Presidential assent to the Interest Rate Bill signifies failure of the regulator-CBK

President Kenyatta’s final assent to the interest cap bill into law is a clear indication of the perpetual failure of the regulatory authority to monitor and control the commercial banks. The CBK has all the regulatory tools at its disposal to ensure commercial banks operate within the acceptable limits that do not exploit borrowers to the extent of making them poorer. May be there are also bandits and cartels in the banking industry as once stated by the immediate former Chief Justice.

Kenyans must remember that on November 12, 2015 the CBK governor ordered banks to reduce lending rates to no avail. Instead, the commercial banks increased their lending rates by mid-December 2015. So what is the role of the regulator? Why do we even have the regulator? Why has the regulator abdicated its responsibility of monitoring and regulating the operation of commercial banks?

In October 2015, Kenyans woke up to a collapsed Imperial Bank, which was put under receivership over massive fraud of up to U.S. $380 million. Similarly, on 7th April 2016 CBK put Chase Bank under receivership over liquidity problems. How would such massive financial improprieties catch the regulator unawares just like any other Kenyan? The answer is simple; the regulator has miserably failed to regulate the commercial banks. While I agree that putting a cap on the interest rates may not be the best option in a free market, Kenyans will acknowledge that this measure was instigated by the inability of the Regulator (CBK) to control commercial banks even after the government made pleas to banks to offer cheaper credit in order to stare economic growth.

In economic terms, the decrease in interest rates as envisaged by the interest rate bill will cause consumption and investment spending to rise and so aggregate demand rises. In such monetary policy, a change in the money supply will directly stimulate production, employment, and price levels, which is good for the GDP in the long run. Under this monetary law, CBK must therefore undertake their regulatory duty to ensure the growth rate of money supply equal the growth rate of real GDP, leaving the price level unchanged. This means that if the economy is expected to grow at 2 percent in a given year, the CBK should allow the money supply to increase by 2 percent. There should be no panic as the economy will equilateral in the long run and banks will make reasonable profits.