The High Court ruling that found the law capping bank interest rates unconstitutional has exposed cheap loans to fresh assaults by powerful institutions led by the Treasury and Central Bank of Kenya.
Also expected to join the onslaught on interest controls are Washington-based World Bank and International Monetary Fund (IMF), which have not hidden their disdain for the radical legislation.
Kenya is looking to sign a fresh credit arrangement with the IMF, which the latter has pegged on the abolition or dilution of interest rate controls.
Analysts say unlike in 2016 when the proposals might have found these groups unprepared, this time round they will deploy their best lobbying machinery as they seek a liberal price setting regime on loans.
However, they will not have it easy in a National Assembly full of lawmakers known to exploit the slightest opportunity to ingratiate themselves to voters.
The Members of Parliament, however, insist they are only championing public interest - and they will do even more when they start debating the law.
Critics have suggested, though without offering evidence, that MPs’ interest is private rather than public. According to them, legislators came up with the capping law to lessen their burden of servicing huge loans.
Kiambu Town MP Jude Njomo, the man who brought to Parliament the amendments that resulted in the Banking (Amendment) Act, 2016, said Parliament has the mandate to address matters of public interest, and a cap on the price of loans was one of them.
With the court ruling, said Mr Njomo, justice was sacrificed at the altar of technicalities.
“The court did not consider the spirit of the law, they considered the technicalities,” he told Weekend Business.
Bonface Oduor, the petitioner, asked the court to determine constitutionality of the provisions of the Banking (Amendment) Act No. 25 of 26, which criminalises charging of interest rate by financial institutions at more than four percentage points above the Central Bank Rate (CBR) set and published by Central Bank of Kenya.
The court agreed with the petitioner, who had sued Kenya Bankers Association (KBA), a lobby for commercial banks, and CBK.
However, it gave Parliament a year to iron out the unconstitutionality in the law, setting the ground for a fierce economic battle between protectionists and liberals in the country.
“Mindful of the possible ramifications and disruption on existing contractual relationships between banks and their customers, the court suspends the effect of the declaration for 12 months from the date of this decision to give the National Assembly an opportunity to reconsider the provisions,” the judges ruled.
They said section 33B (1) and (2) of the Act, providing for CBK to regulate how much lenders can earn from customers, was “vague, imprecise, ambiguous and indefinite.”
The court faulted Parliament’s amendments, which criminalised charging of interest rate above the prescribed threshold.
The law provides that a bank or financial institution that commits this offense be fined one million shillings while its chief executive officer shall be liable to imprisonment for a term not less than one year.
“Article 29 (a) of the Constitution guarantees a person the right not to be deprived of freedom arbitrarily or without just cause. While article 50 is on the right to fair hearing. The Court therefore declared the Sections 33B (1) and (2) of the Banking Act to be null and void,” read an abridged version of the ruling.
But MPs are undeterred, insisting that in the next 12 months they will try to align the law to comply with the requirements of the Constitution. But they will not abolish interest controls.
According to Njomo, the ruling is too weak and can be overturned when it is appealed.
Law-makers are reading malice in the case itself, particularly given the fact that parties listed as respondents have been vocal against the rate cap regime.
“This is an interesting case of people taking themselves to court through proxies,” said Njomo, noting that the bankers association and CBK have always wanted the rate cap to be repealed.
“Plaintiffs are unknown, but respondents are organisations that are happy to be taken to court.”
KBA Chief Executive Habil Olaka was not available for response as his phone went unanswered.
Budget and Appropriations Committee Chairman Kimani Ichung’wa, is also not happy with the court’s decision.
“The second and third respondents are the actual plaintiffs, not the petitioner,” said Mr Ichung’wa. He did not give evidence to this allegation.
He however insisted that the MPs will fiercely defend consumer rights.
The legislators are also convinced that it is not the law that has stemmed the flow of credit to small and medium-sized enterprises (SMEs), but banks themselves which might have colluded to withdraw credit to the so-called high-risk borrowers such as SMEs and individuals to push their narrative against the rate cap regime.
“It is not the law that is causing that (reduced credit to SMEs), it is the cartel-like behaviour by banks,” said Njomo.
Credit to the private sector has grown at a frustratingly slower rate, a development that economists fear might have a knock-on effect on the economy.
The World Bank, in its December 2017 Kenya Economic Update, decried the significant slowdown in credit growth in the country.
Private sector credit growth fell from a peak of about 25 per cent in 2014 to two per cent in October 2017, its lowest level in over a decade, noted the report.
Credit growth improved to an average of 4.25 per cent in six months between June and November 2018, before it dipped again to 2.4 per cent.
CBK and IMF attributed the drop to the interest rate cap.
“It is time Parliament heard our plea and helped us remove the interest cap law,” CBK Governor Patrick Njoroge said when he appeared before the National Assembly’s departmental committee on Information, Communication and Innovation in August last year.
“This law has not brought the desired effect which was to make credit affordable. It has, in fact, made it extremely difficult for small-time borrowers to get loans from banks.
“If Parliament amends the law and removes the rate cap, then CBK can regulate the banks and make rates reasonable,” he added.
The IMF added its voice to those pushing for the repeal of the cap. A few months after the Banking (Amendment) Act was enacted, the institution stepped up pressure on Kenya to review the interest rate controls, saying they were hurting SMEs.
“Preliminary information suggests that these controls have had unintended negative consequences on the availability of financing for small and medium-sized enterprises, with the risk of reversing the remarkable increase in financial inclusion observed in recent years,” said IMF in a statement in 2017.
Ichung’wa told Weekend Business they will analyse what the court found to be unconstitutional and re-align the law to make it constitutional, but insisted that credit taps to SMEs did not run dry after the introduction of the rate cap.
He said that studies, including some done by the IMF itself, had shown that credit extension to SMEs was not slow in Kenya alone but in the entire region.
“Is the interest rate cap in the whole of East Africa region? There is data showing that lending to SME sector in the region is going down,” said the MP.
In ruling the provision of the law to be unconstitutional, the court also noted that it interfered with the relationship between a customer and the bank.
But Ichung’wa wondered why the same would not be applied on pricing of petroleum products, which is set by the Energy Regulatory Commission.
Even as he denied the correlation between increased Government borrowing and a reduction in credit extension to the private sector, he said State borrowing is the elephant in the room.
Denied the leg-room to freely charge interest, lenders have ravenously taken up safer Government securities which increased by slightly over 35 per cent from Sh184 billion in September 2016 to Sh249.6 billion by September 2018.
CBK’s primary role of regulating the amount of money in circulation has also been hit by the rate, making it difficult to stabilise inflation.
One of the petitioner’s claims in the suit was that the rate cap interfered with CBK’s monetary policy role. However, the court ruled that the petitioner did not convincingly demonstrate that “within the purview of monetary policy.”
Any reason for celebrations that banks might have had was taken away the moment the judges decided not to declare the cap’s interference with monetary policy unconstitutional.
“As a result, it does not spell the death knell on the cap,” said Stanbic Bank Regional Economist Jibran Qureishi.
He said if the lawmakers are adamant that the law stays, they will simply improve it without any material changes. But he said the law as it is has been detrimental and should be repealed.
“They keep on saying banks are making money, but they don’t look at ‘how’ banks are making money,” said Mr Qureishi, adding this is mainly by lending to Government.
“Banks need to get back to being banks - lending to the private sector,” he said.