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Banks should increase lending to businesses

By The Standard | Updated Sat, March 18th 2017 at 00:00 GMT +3

Commercial banks must stop trying to manipulate stakeholders to have interest rate capping laws repealed without demonstrating that they have reformed. The banking lobby, Kenya Bankers Association, has been quick to attribute the decline in profits reported by most banks in recent weeks to this law. The lobby argues that only the unconditional repeal of this law will increase credit flows to the private sector.

We reject this argument. For many months, banks have downplayed the relief that the interest rate capping law has brought to millions of individual borrowers and businesses. Instead, they have demanded to be allowed to operate in much the same way as before when their cartel-like behaviour determined lending rates.

To ordinary Kenyans, the enactment of this law offered a legitimate means of cushioning them against usurers and insensitive banks. Commercial banks have often thrived on their monopolistic behaviour and ignored endless pleas from the Central Bank of Kenya (CBK) to voluntarily introduce fairer rates. In the six months that the law has been in place, it has been difficult for the average borrower to access loans. The excuse by banks for limiting their credit flows to the private sector is that the lending rate margins allowed by law are too narrow.

In explaining their declined profits, some banks have pointed to a harsh business environment but it has emerged that some positive results in the balance sheet may have been overstated. For many years, a complacent CBK allowed lenders to exaggerate their profits and they padded their incomes and depressed expenses, including failing to classify unpaid loans as bad loans.

Then came along the no-nonsense new CBK governor, Dr Patrick Njoroge, whose actions to stop the rot ultimately led to the closure of weak or non-compliant banks. Many of the bad loans previously concealed by these banks were discovered.

It is now clear that the decline in profits is largely as a result of the painful remedial measures. Let us build on this clean-up and ensure that banks operate above board.

For a start, commercial banks must allow more borrowers to access loans since access to credit means more opportunities for everyone, including the banks themselves. The interest rates capping laws should only be repealed if commercial banks can demonstrate they can operate responsibly.

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