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Victory for borrowers as MPs defy Treasury and IMF to retain rate cap

By Dominic Omondi | Published Fri, August 24th 2018 at 00:00, Updated August 23rd 2018 at 22:27 GMT +3
Kiambu Town MP Jude Njomo, who proposed the cap on commercial banks’ lending rates. [File, Standard]

Borrowers will enjoy cheaper loans after Parliament proposed amendments to the rate cap that may bring the lending rate to 11.6 per cent.

Currently, the Central Bank Rate (CBR), which is the benchmark used to price loan interests, stands at nine per cent. Lenders are restricted to adding four percentage points, bringing the maximum interest charged to 13 per cent.

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However, under the proposed amendments, the National Assembly’s Committee on Finance and National Planning wants lending rates calculated using the Kenya Banks Reference Rate’s (KBRR) base rate of 7.6 per cent, hence interest charged by lenders can only go as high as 11.6 per cent.

“Section 33B of the Banking Act is amended by deleting subsection (1) and substituting therefore the following new subsection,” read part of the Joseph Limo-led committee’s report tabled yesterday in Parliament.

“A bank or financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent above the base rate set and published by the KBRR.”

The committee had resisted the Government’s and International Monetary Fund’s (IMF) aggressive push for the removal of the interest rate cap. This is a major to blow to banks that have been lobbying for the removal of the rate cap, arguing that credit available to micro, small and medium enterprises (MSMEs) has shrunk.

The Kenya Bankers Association, an association of local banks, was one of the lobby groups that presented their proposal before the committee where they pushed for the removal of the rate cap as had been proposed by Treasury CS Henry Rotich.

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Before the rate cap was imposed, the Central Bank of Kenya (CBK) had introduced the KBRR that gave a recommended base rate but allowed banks to factor in their premiums to cover perceived risk.

Banks largely ignored the rate and charged exorbitant rates, which led to the calls for a ceiling that eventually introduced the rate cap.

Last year, the regulator even did away with KBRR, which was calculated as an average of the CBR and the two-month weighted average of the 91-day Treasury Bill rate.

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“The Monetary Policy Committee considered the KBRR, which was introduced to provide a transparent credit pricing framework. In view of the adoption of the new law capping interest rates, the CBK decided to suspend the KBRR framework,” said Central Bank Governor Patrick Njoroge in January last year.

Banks have continued to rake in profits despite the rate cap, with their profitability increasing by as much as 18 per cent.

In March, National Treasury Cabinet Secretary Henry Rotich and Dr Njoroge requested IMF for a six-month extension of a 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 taps for the private sector run dry with banks instead opting to lend to Government and corporates.

 


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