CBK reversal of interest rate cap should not disadvantage borrowers

Central Bank of Kenya governor Patrick Njoroge. Photo: David Njaaga

The August 2016 amendment to the Banking Act to deny banks a free hand in deciding what interest to charge customers on loans was welcome news for many customers. Newspapers were full of stories about Kenyans struggling under heavy debts that accumulated high interest rates as banks basked in the glory of very high profits despite glaring inefficiencies in their business models.

A year down the line, Central Bank of Kenya, which had clearly stated from the onset that switching from market-controlled interest rates would be problematic, has made it open that the cap was only a temporary measure. The latest bank performance has seen the sector’s profitability drop and many banks have reacted by denying many customers loans on account that their risk is higher than the law allows them to cover. Negative credit growth will only serve to slow the economy because it will mean that the private sector is being starved of money to expand.

Generally, Kenya is married to market-controlled pricing but sectors such as oil, where the prices are regulated, have served to shield the public from cartel-like behaviour in the market.

Should Parliament receive the bill to remove the cap on interest rates, it should be guided by the will of the public who by now may have taken loans at not more than 14 per cent interest rates. Reversing the law will likely send the rates above 14 per cent, meaning a higher burden of servicing loans.

We may need a clause to shield borrowers so that those who have taken loans at the current rates can continue to service them at the same rate. CBK should work closely with banks to make it possible for borrowers to benefit from credit-sharing information instead of this being used as a tool for blackmail. Banks should help de-risk customers through education on financial planning as opposed to denying them loans on grounds that they are too risky.