Commercial banks are making too much profit at the expense of borrowers, National Treasury Cabinet Secretary Henry Rotich has said.
While he does not support the legislation of interest rates as proposed in the amendments that are awaiting President Uhuru Kenyatta’s assent, the CS told Weekend Business that lenders have a lot of scope to cut interest rates.
“Banks should be making some decent profits like any other business, that is why we are saying there is scope for them to lower interest rates,” Rotich said.
Banks were expropriating excessive profits from excuses used to justify the expensive loans they give, including high personnel costs. The focus should be on identifying the root cause of the high lending rates, he said.
This is the first time that Rotich has attacked the banks for greed. He said the lenders could learn to live with less profits by reducing their lending rates. Interest income makes up more than half of the Kenyan banking sector’s cumulative income.
Locked out of loans
In the three months leading up to March 2016, banks reported more than Sh38 billion in net profits according to the statistics from the Central Bank of Kenya. Lending rates are anywhere above 20 per cent, but the proposals passed by the National Assembly would cut them to no more than 14.5 per cent — in a measure that would hurt the sector’s profitability.
The CS said capping interest rates would be the wrong intervention for cutting the cost of credit and that he would advise President Uhuru Kenyatta to veto the amendments.
“This is what the President needs to be informed so that he makes a very informed decision,” Rotich said, in the strongest indication yet of the content of his counsel to State House. Borrowers considered as high risk would be locked out of loans, said the CS, in justifying his objection to the amendments that seek to cap interest rates.
“Banks will easily turn away a borrower whom they think is of a higher risk profile if we cap the rates, meaning such a guy can’t get a loan.”
Typically, the President would take advice from the finance boss and the CBK before making any pronouncements on financial matters. CBK boss Patrick Njoroge has also repeatedly asked the President to reject the amendments that introduce controls to interest rates, citing the same reasons as the National Treasury.
But the high interest rates have become a highly emotive matter that resonates with a large portion of the population. As a pointer, the amendments on the Banking Act seeking to regulate lending and deposit rates sailed through the National Assembly — whose members are among the biggest borrowers, without any resistance.
The State, Rotich says, has done its part in ensuring that the macro-environment enables lower lending rates, including a stable inflation and limited borrowing from the domestic financial markets.
As an example, lending rates breached the 30 per cent mark in 2011 following the surge in inflation which touched 19 per cent. Rotich said he would not want to pre-empt the decision that the President would make but sounded confident that he was likely to return the Bill to Parliament.
In the outcome that the Bill is returned, the MPs will have to reconsider their stand and review the President’s recommendations. MPs could however overrule the President and force the Bill into law.
Banks are currently lobbying heavily to block the enactments of the proposals, including the announcement last week that they would set aside Sh30 billion in a kitty that would be accessed by small businesses at concessionary rates.
In response, the MPs have rubbished the pledge, saying that it was not binding and thus not enforceable.
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