Only MPs stand between Treasury CS Rotich and rate cap law

The fate of the rate cap law has now moved to Parliament after Treasury Cabinet Secretary Henry Rotich laid bare his plans to repeal it. Now, Members of Parliament remain borrowers’ only hope for cheap loans.

After months of speculation on whether Rotich would only reform the law or have it expunged, he has set the record straight preferring to get rid of the law. The law caps interest rates at 4 per cent above the Central Bank benchmark rate.

“I propose to amend the Banking (Amendment) Act, 2016 by repealing Section 33B of the said Act. This is to enable banks and other lenders to provide more credit especially to borrowers they consider riskier,” Rotich said in his Budget Speech on Thursday.

Parliament has to weigh in on whether Rotich’s proposals to give small businesses loans and guarantee the facilities they take from banks are a good enough trade-off for repealing the interest rates cap law.

The Government is forming a deep-pocketed fund and a development bank specifically for SMEs, as well as offer credit guarantees.

It has collapsed Uwezo Fund, Youth Enterprise Fund and Women Enterprise Fund into Biashara Kenya Fund, which will be a stronger institution with a larger balance sheet for SMEs.

The Government has also set up the Kenya Development Bank, which will usurp the Industrial and Commercial Development, Tourism Finance Corporation and Development Bank and serve as an SME lender.

Biashara Kenya Fund is expected to start with an initial capital of Sh2 billion and offer loans at 6 per cent.

The amount can also be lent to intermediaries such as commercial banks, which will in turn lend to the special groups at a maximum rate of 10 per cent. Not more than 25 per cent of the fund’s cash will be loaned to intermediaries.

Blanket removal

The Treasury believes that this, coupled with the consumer protection law, Financial Markets Conduct Bill, 2018, will be sufficient to address the country’s credit market and nip the rate cap in the bud, just two months shy of its second anniversary.

While Rotich has said Biashara Kenya Fund and Kenya Development Bank will help address the rate cap concerns, neither is already operational and have only gone through Cabinet approvals.

Offers to give credit guarantees have also not been actualised, and little information has been offered as to the size and details of the state guarantees.

Last year, Kikuyu MP Kimani Ichung’wa, who is the current chair of the National Assembly’s Budget Committee had drafted the Banking Amendments Bill of 2017 seeking to tighten the rate cap law. He said that he will not back a blanket removal unless CS Rotich comes up with a negotiated deal.

He said he would only back the deal if banks would commit to setting aside 15 per cent of their loan-book to lend to SMEs at concessionary rates, and Treasury puts its house in order to reduce borrowing heavily in the domestic market.

Rotich stated that the consumer protection law, Financial Markets Conduct Bill, 2018 will address the issues that necessitated imposition of the rate cap.

“It addresses the problems of predatory lending and reckless behaviour by credit providers; exploitation of consumers by debt collectors; lending without regard to a borrower’s ability to repay leading to high levels of indebtedness; deceptive pricing; and abusive collection techniques,” said Rotich.

Central Bank Governor Patrick Njoroge has openly opposed the law, saying it usurps its own mandate as the banking regulator. “This Bill does not deal with interest rate cap issue and does not deal with fundamental issues that led to the caps. It actually takes a step in the wrong direction,” said Dr Njoroge.

Industry players have also dismissed the consumer protection law especially where it recommends rates for lenders, proposes an additional regulator who has far-reaching powers.

Lure savers

“This law will put a cap on the market, this is worse than the rate cap,” Equity Bank CEO James Mwangi said at a recent Vision 2030 retreat in Mombasa. Mwangi is also the chairman of Vision 2030 Board.

He pointed out that lumping banks together with all other lending institutions including small players will limit their ability to innovate.

Rotich in his Budget Speech said the draft Financial Markets Conduct Bill, 2018 is currently undergoing stakeholder consultations before Cabinet consideration.

He also put out that digitisation of title deeds and a registry will help safeguard collateral and the Government will develop mobile bond M-Akiba to lure savers from banks that do not reward their customers with meaningful interest on deposits.

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