The Central Bank's bid to have the interest rate cap law scrapped has failed.
Members of the Finance Committee yesterday rejected Governor Patrick Njoroge's plea to remove controls on interest paid on bank loans and deposits.
The legislators told him the removal of the rate caps was meant to please the Bretton Woods institutions – the International Monetary Fund (IMF) and the World Bank – at the expense of borrowers.
“Members are concerned that the Government appears to be taking us back to the 1990s, when the two institutions introduced to us the strategic adjustment programmes (ASP). The Government of retired President Kibaki (Mwai) ignored these institutions with their demands and looked East," said committee chairman Joseph Limo.
“In his first term, even President Uhuru (Kenyatta) had looked East, but the questions we are asking are whether you now want to take us back to the days of ASPs, where the country was at the mercy of IMF and World Bank?” the Kipkelion East MP asked.
Kiambu Township MP Jude Njomo, who introduced the Bill, opposed the removal of the caps, claiming CBK had been opposed to the law since it was introduced in Parliament.
Put to the test
“This law has barely been put to the test. It has only been in place for one year, but we know that the governor...has been opposed to the capping and we want him to tell us what he has done to ensure banks comply with the law,” he said.
Mr Njomo added that it appeared as if CBK and commercial banks were colluding to defeat the capping, warning that legislators would not bow to pressure from even IMF and World Bank.
But Dr Njoroge - a former employee of IMF - dismissed claims that he was acting according to the whims of his former employer, insisting that the caps introduced inefficiencies that were hurting lending and economic growth.
“Our estimate is that there is already a negative impact on credit growth and also on the economy as a result of this. We need to ask ourselves, does the lowering of rate lead to increase in credit uptake? We are not sure about it,” said Njoroge. IMF and the World Bank have been pressing the Government to amend the Banking Act to scrap the capping of interest rates.
The institutions have argued that the introduction of the caps has impeded economic growth, with banks shying away from granting small loans, instead opting to invest in securities and lending to corporate bodies.
IMF has even placed conditions on the Government that further access to its precautionary facility was conditional on the removal or amendment of the law on the interest caps.
And when Njoroge, backing his arguments with statistics, tried to lobby MPs to consider removing the capping, the legislators protested, saying CBK should not bow to the demands of the 'imperial powers'.
“The proposal to withdraw these caps is not because we cannot see the dangers, but we need to put up measures that will help address the challenges we have witnessed, even as we embrace the best practices,” Njoroge argued.