Fact Checker: Bankers lying on rate cap law

Commercial banks in Kenya have maintained stiff opposition to the Banking Amendments Act 2016 introducing interest rate capping as they continue to lobby to have them repealed.

The lenders have received support from the International Monetary Fund which recently listed repealing the rate cap as one of the conditions for continued monetary support to Kenya.

Equity Bank Chief Executive Officer James Mwangi last week repeated a familiar line of defence made by bankers throughout the interest rate debate, insisting the rate cap is making credit inaccessible to Kenyans.

Equity Bank Group CEO James Mwangi during the release of results in Nairobi. He said the rate cap is making credit inaccessible to more Kenyans. [David Njaaga, Standard]
“What they (government) will do is continue marginalising the Kenyans who cannot get bank loans and leave them to borrow from shylocks, telecoms and microfinance institutions,” said Mwangi while announcing the bank’s financial results. The claim that the interest rate cap is locking out Kenyans from affordable credit is, however, not true. The latest Central Bank of Kenya’s (CBK) credit survey published in March this year indicates that commercial banks responded to the interest rate cap by tightening credit standards for Small Medium Enterprises (SMEs) and individuals to cushion themselves against the risks of non-performing loans.    

This was done in the expectation that capping lending rates at 14 per cent from the previous 28 per cent in some cases would see an avalanche of loan applications from SMEs and individuals.

This was, however, not the case. CBK data indicates demand for credit maintained an even level in recent months and even went up in other sectors fuelled by an economic rebound from last year’s contentious general election.

“The perceived demand for credit remained unchanged in ten sectors,” said CBK in its report in part. “Demand, on the other hand, increased in the trade sector with respondents attributing this to an increased demand for goods and services.”

At the same time, commercial banks reported they expected levels of non-performing to drop in the current quarter which CBK noted was attributed to “enhanced recovery efforts implemented by most banks.” Furthermore, commercial banks admitted that credit standards – the guidelines used to evaluate customers’ creditworthiness remained unchanged across sectors.

“Credit standards remained unchanged in all the eleven economic sectors in the first quarter of 2018 which was a similar trend observed in quarter four of 2017,” said CBK in part.

This means banks’ shunning SMEs and personal borrowers in favour of government papers are not based on heightened risk profiles but economic incentives. Repealing the rate cap law would thus only serve to boost banks’ bottom lines.  

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Banking Amendments Act 2016interest rate cappingRate capCBK