Debate on rate cap now shifts to House ahead of IMF deadline

Parliament building in Nairobi.
Treasury mandarins, Central Bank of Kenya (CBK) officials, bankers and economists will this week all train their eyes on Parliament as law-makers debate interest rate capping on loans.

Analysts say MPs may not remove the capping since most of them have accumulated loans.

The interest rate ceiling debate has divided observers with more Kenyans lobbying for its retention to tame rogue lenders even as banks and other lobbies root for a free market economy.

While some experts vouch for its retention arguing that it has offered a reprieve to borrowers who for long had been ‘exploited’ by greedy lenders who raked in super-profits by charging exorbitant interest rates, liberal economists call for its removal.

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They argue that most risky borrowers such as the thousands of micro, small and medium-sized enterprises in the informal sector have been locked out of the credit market as banks are denied them the leeway to price them according to their risk.

Treasury and CBK, however, have less than two weeks to show the International Monetary Fund (IMF) that they have kept their word. In March, National Treasury Cabinet Secretary Henry Rotich and CBK Governor Patrick Njoroge requested IMF for a six-month extension of Sh150 billion stand-by arrangement to institute measures that would result into, among others, removal or significant modification of interest controls.

The IMF insists the rate cap has seen the credit tap to the private sector run dry with banks opting to lend to Government and corporates.

Although credit to the private sector is yet to jump past the two percentage growth, recent half-year financial results have shown that banks still made huge cash by lending.

And as lawmakers debate a report on the Finance Bill, 2018 by the Finance Committee today, among the proposals in the Bill is one by Treasury is to repeal of Section 33B of the Banking (Amendment) Act, 2016 which put a ceiling on interest rates banks and other lenders would charge a loan at four points above the Central Bank Rate, currently at nine per cent.

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Banks are now charging an interest rate of 13 per cent.

“Mr Speaker, the interest rate ceiling has contributed to slow growth in credit to the private sector, and especially to micro, small and medium enterprises (MSMEs) in the agriculture and trade sectors. Moreover, the aim of the amendment which was to expand access to financial services and increase return on savings has not been achieved since banks have shied away from borrowers they consider riskier and have priced above the maximum lending rate,” said Rotich in his June Budget speech.

The CS said the Government was working on a raft of measures to enhance access to affordable credit by MSMEs.

“The Government is working jointly with the private sector and development partners to introduce a National Credit Guarantee Scheme as a policy tool to direct credit to MSMEs. The Credit Guarantee Scheme will work through easing the financial constraints of MSMEs and start-ups by enabling them to access capital,” explained Rotich.

The Government would also merge institutions into one, a move that will see massive lenders with bigger balance sheets.

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Thus, a number of financial institutions would be amalgamated into the Kenya Development Bank; and there would be the establishment of Biashara Fund which brings together Uwezo Fund, Youth Enterprise Development Fund and Women Enterprise Development Fund.

However, since then, the Government has been blowing hot and cold on the promises it made to the IMF and displaying some reluctance to remove interest rate cap. 

Treasury and CBK authorities are yet to give Bretton Woods institution the nod to publish an IMF staff report, in what some insiders say is due to stringent conditions on debt uptake.

However, in recent times, a senior economic advisor to the Government has been quoted as saying that Kenya will not sign up to IMF’s precautionary credit facility, noting such stringent conditions as removal of rate cap and narrowing fiscal deficit will hurt consumers.  

Treasury Principal Secretary Kamau Thugge, however, said the advisor does not speak for the Government.

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And the lawmakers do not look like they are willing to play ball, leaving Treasury in a precarious position. “MPs are Kenyans, they are borrowers. Do you expect them to remove the rate cap?” wondered Kimani Ichungwa, chair of the parliament’s influential budget committee.

CBK and National Treasury believe they have put everything in place to prevent banks from sliding back to their cowboy behaviour of the pre-rate cap days, impulsively setting the price of loans as their whims dictated.  

National Treasury started with the Financial Markets Consumer Protection Bill 2018, currently before Parliament and is set to be debated together with the Finance Bill, 2018.

CBK has invited comments on the Draft Kenya Banking Sector Charter that is supposed to safeguard consumers against greedy lenders.

The Charter represents a commitment from institutions in the banking sector to entrench a responsible and disciplined banking sector cognisant of, and responsive to, the unique sociology-economic realities of the Kenyan populace,” reads part of the charter.

“The removal of the interest rate caps is critical to developing a market-led financial sector; however, the banking sector must fully demonstrate that they are responsible and disciplined,” it reads.

But after all, is said and done, it is the MPs that will have the last call.

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Central Bank of KenyaCBKrate capIMFnational treasury