The interest rate cap on loans will soon be reversed to allow the market to determine the pricing of credit, the Central Bank governor has said.
Speaking to the press after meeting investors, mostly in the equity and fixed income segment, Dr Patrick Njoroge said banks will be handed back a free hand in pricing the cost of loans since the impact has been 'problematic'.
“It is in our interest as a country and CBK to work to reverse these measures and go back to a regime with freely determined interest rates but in a disciplined environment,” he said. “It is clear to us that this has been problematic in many ways. I can tell you the direction but I cannot tell you when.”
The governor said he has assured investors that the country is 'completely wedded' to market-based policies and that the rate cap was just a temporary deviation due to the indiscipline that had been observed in the credit market.
Parliament passed an amendment to the Banking Act last year that set the maximum interest rate on loans at four per cent above the Central Bank Rate. Interest on deposits was fixed at minimum seven per cent of the benchmark rate.
A study that CBK has been conducting to determine the impact of the rate cap has progressed well and preliminary results will be made public next week, he added.
Dr Njoroge said he has had discussions with banks on their new business models in a quest to have discipline in the credit market and hopes this will yield favourable rates.
“Of course we still want to have a profitable business but the question is how much,” said the governor, alluding to the talk that the sector has been recording super-normal returns.
Banks were supposed to have submitted their new business models to CBK by the end of April and the CBK believes this will instil credit discipline and prevent oppressive interest rates. The models were to be discussed and approved by respective boards.
Dr Njoroge called for patience in the sector as the CBK concludes the process, which will then have to be passed through Parliament.
“Things don’t develop in a monotonic way, where everything is going down or up. There are always bumps along the way,” he said.