President Uhuru Kenyatta must be lauded for refusing to accede to the Finance Bill 2019 in light of its failure to amend the Banking Act as proposed by the Executive.
However unpopular with MPs, this Presidential prerogative is one of those necessary ways by which the Executive can check a rogue Parliament by allowing the President a window to “legislate” unless two thirds of Parliament outvotes him.
In September 2016, Parliament passed an amendment to the Banking Act that capped interest rates at four per cent of the Central Bank of Kenya Base Rate.
On the face of it, this move was beneficial to the common mwananchi who was finding loans unaffordable due to punitive interest rates charged by banks. Many MPs who spoke in support of the Bill waxed lyrical on the challenges that borrowers from the Small and Medium Enterprises (SMEs) were undergoing when approaching the “greedy” banks.
At that time, many in the banking sector were drowned out when they protested, raising several concerns about the implications of the amendments.
Principally, they argued that the cost at which money is lent was informed by numerous factors, the primary one being the risk attendant to lending to the customer in question.
Credit worthy customers with little risk, including the availability of credible security, were rated highly and consequently attracted lower rates of interest. Smaller and less known customers who either had weak or no collateral to support their borrowing naturally got loans at a higher interest rate.
To place all borrowers under one category, thus denying banks discretion in determining the cost of money, failed to consider basic banking principles and would naturally prejudice the smaller, more risky borrowers. That has come to pass.
In the last three years since enactment of the offensive Section 33B of the Banking Act, banks have concentrated their lending to large corporates and lending to the SME sector has dropped by more than 10 per cent. The effect of this is to slow down the overall growth of the economy significantly.
As a direct result of this squeeze, numerous other entities, including the now infamous “lending apps” which are not regulated under the Banking Act have entered the market and are offering very expensive micro-lending to individuals and business in the SME sector.
What has compounded the situation, to the detriment of the SME borrowers, is the unwavering appetite for borrowing by the government from both local and external lenders. In the absence of any real limit to the monies that banks could lend to government, it made no sense to cap interest rates.
All that the banks did was lend this money to the government at no risk and at reasonable rates almost equivalent to the statutorily capped rates. Why would any bank worth its name go into the market, lend to risky borrowers at a rate predetermined by the law, while it could cash in on risk free Treasury Bills Bonds and other government securities?
Ultimately, between the large risk free corporates and the government, the banks were fully satisfied, leaving the SMEs at the mercy of what are no less than shylocks. Many of these are closing shop under the weight of unsustainable debt.
These are some of the issues our MPs in their quest to play to the gallery, pretending to look out for the common man, failed to apply their minds to. So, bravo to the President and may the National Assembly fail to raise the majority needed to overrule him.
However, the President’s action will be of little effect if Jubilee’s appetite for loans remains at its current level. The banks will continue to prefer the easy money that comes from government securities thus prejudicing the private sector.
That will undo all the good intentions expressed by the President in his memorandum to Parliament. That would be a monumental shame.
-The writer is an advocate of the High Court of Kenya.
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