If you are a risky borrower, you could soon be forced to pay higher interest on loans if a new proposal by an MP is passed into law.
Gatundu South MP Moses Kuria wants the interest rates cap law reviewed to allow banks to charge up to 19 per cent on loans depending on customers’ risk profile.
Mr Kuria wants unsecured borrowers and small businesses to pay six percentage points above the cap which is currently set at 13 per cent.
“I wish to introduce an amendment to the Banking Act to introduce a risk negotiation window of up to six per cent above the lending cap for SME’s and unsecured individual customers to negotiate pricing based on the risk profile and a willing-buyer-willing-seller basis,” says Mr Kuria in a letter to the Speaker of the National Assembly.
He says the rate cap had only benefitted the National Treasury whose appetite for debt had ballooned, “spiralling debt into the single most threat to the economy while distorting fundamentals” at the expense of small businesses.
According to the latest Central Bank of Kenya Credit Survey, 51 per cent of financial institutions polled indicated that interest rate capping had negatively affected their lending to Small and Medium Enterprises (SMEs) whereas 49 per cent of the respondents indicated that they had experienced a positive effect on the same.
But the controversial legislator, who once worked at Standard Chartered Bank, has also proposed that the four per cent charge above Central Bank Rate (CBR) be charged on low-risk clients. This has the potential of banks exploiting the ambiguity in the provision and further squeezing borrowers hard.
But Consumers Federation of Kenya (Cofek), a consumer lobby has dismissed the new proposal, saying banks are likely to exploit the window to charge higher rates while shunning SMEs.
“The fact that the government has to raise the huge budget deficit from the domestic borrowing means that even if caps were removed, the banks will prefer to lend to the risk-free government than lend to individuals or SMEs,” said Cofek Programmes Officer Onesmus Mutungi in a statement.
The consumer lobby accused Mr Kuria of fronting the interests of banks yet they continue to make huge profits.
Jibran Qureishi, economist for East Africa at Stanbic Bank said banks are making money from the Government which had reduced activity in the economy.
“We should not look at whether banks are making money but rather how they are making money. Basically, banks are lending money to the Government instead of the economy,” said Mr Qureishi.
He added that efforts to change the rate cap law last year did not go far enough when the 70 per cent of the benchmark rate for savings was scrapped.
Mr Qureishi said this had only led to segmentation, benefitting bigger banks as smaller banks still lacked cash to lend, further stifling the flow of money into the economy.