How lenders lost spirited fight to control interest rates on loans
By Dominic Omondi | August 25th 2016
Before the President assented to the bill capping interest rates, banks had frantically lobbied him not to sign it into law.
Lenders, in their desperation, put together a memorandum of understanding (MoU) in which they promised to implement a host of measures that would bring down the cost of credit.
However, these tepid measures—promising to slash interest rates by 0.97 per cent and setting aside a Sh30 billion kitty for women and youths—only succeeded in exposing the underbelly of banks as arrogant outfits that are out-of-touch with the public.
That is why, when signing the bill into law, the President described banks and financial institutions as "lacking sensitivity."
The one percentage reduction in interest rate was like an insult to the public, as Central Bank of Kenya had already reduced the Kenya Bankers Reference Rate (KBRR) by a similar margin to 8.5.
The least banks could have done is bring down their interest rates by the same margin.
MPs lashed out at the banks' proposals, seeing in them a desperate move to hoodwink the President not to sign the bill into law.
Besides enticement, banks through their umbrella body Kenya Bankers Association (KBA), also attacked the spirit of the law.
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"We appeal to the (President) not to assent to the bill," said KBA chief executive Habil Olaka.
"We believe that referral of the bill back to Parliament will be the right thing to do," said Mr Olaka, before handing over the MoU to CBK boss Patrick Njoroge.
According to banks, putting a ceiling on how banks charge loans would see lenders cherry-pick borrowers to avoid high-risk clients.
According to them, the law would be counterproductive as high-risk small-scale borrowers would be denied credit facilities.
In addition, the enactment of the bill would also result into the mushrooming of illegal shylocks who charge exorbitant rates, warned banks.
But now the President has given them a cold shoulder, noting that they (banks) have been indifferent to wishes of the public.
"Since receiving this bill, I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks," said Mr Kenyatta in a statement.
The President went on: "These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns."
At the heart of the disdain by Kenyans against banks are the super-normal profits they report at the end of every financial year.
Last year, for example, banks raked in a massive Sh134 billion in profits, even as Kenyans struggled to repay their high-interest rates loans.
At some point, interest rate shot up to over 25 per cent after Central Bank raised its benchmark rate to curb inflation.
However, it appears to be a case of rocket-and-feather effect where interest rates shot up at the speed of a rocket when the CBR rate went up, but came down slowly like feathers when CBK revised its rate downwards.
And although, Central Bank has done all it can to ensure interest rates come down by coming up with the KBRR, banks have still defied this by charging interest rates far above the instrument.
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