CBK Governor asks Parliament to scrap rate cap law

Central Bank of Kenya Governor Patrick Njoroge when he appeared before the Senate Communication, Information and Innovation Committee on the inquiry into legislative and regulatory gaps affecting competition in the telecommunication sub-sector. [Boniface Okendo, Standard]

Borrowers should brace themselves for tough times if Parliament heeds a plea from the Central Bank of Kenya (CBK) to scrap the law that caps interest rates.

While appearing before Parliament’s departmental committee on Information, Communication and Innovation on Thursday, CBK Governor Patrick Njoroge made a case against the Banking (Amendment) Act 2016 that capped lending rates at four percentage points above the Central Bank Rate (CBR).

The CBR currently stands at 9 per cent, meaning banks can charge not more than 13 per cent per annum. Dr Njoroge told the MPs that it is time the country did away with the law.

He revealed to Parliament that borrowers, especially Small and Medium Enterprises (SMEs) and the common mwananchi, will continue getting locked out of access from credit if the rate cap is not removed.

“It is time Parliament heard our plea and helped us remove the interest cap law,” Njoroge said. “This law has not brought the desired effect which was to make credit affordable. It has, in fact, made it extremely difficult for small-time borrowers to get loans from banks. If Parliament amends the law and removes the rate cap, then CBK can regulate the banks and make rates reasonable,” he added.

But the committee, led by William Kisang, took Njoroge to task saying in fact, it is time the Micro Finance Act was also amended, to harmonise it with the Banking Act. This would rein in micro finance institutions that charge high-interest rates without paying attention to the rate cap.

Committee member Chelule Chepkorir described the pain small time borrowers go through, especially women affiliated with micro finance institutions while struggling to pay back loans.

“I know women who are really struggling to pay loans from micro finance institutions where the interest rates are too high,” said Ms Chelule.

“But they can’t and sometimes their family property is auctioned. What the governor should do is push for the amendment of the Micro Finance Act to bring the rates down. Not ask for the abolishment of the rate cap,” she added.

Mobile credit

The MPs are also demanding that the loans advanced by mobile credit platforms such as M-Pesa, Equitel, Airtel Money and Telkom’s T-Kash be subjected to the rate capping law. This, they said will protect consumers especially those who are not financially literate.

“You will find a mama mboga who borrows from M-Pesa and pays back the money on the same day. She borrows every day and pays the same interest that she could have paid if she had stayed with the money for a whole month,” said Mr Kisang.