Parliament rejects request to remove interest rate caps

The Parliament has rejected a Finance Ministry request to scrap commercial lending rate caps that critics say have led to a credit squeeze, a lawmaker who was present during a vote on the 2019/20 (July-June) fiscal budget said.

“The caps are going to remain,” Jude Njomo, who first pushed for changes in the banking laws in 2016 to introduce the caps, told Reuters by phone.

In 2016, the government limited rates banks can charge customers at four percentage points above the central bank’s benchmark - currently 9 per cent - saying they were concerned about high rates.

Lawmakers voted by acclamation to reject the Finance Ministry’s request on the caps contained in the 2019/20 budget, although they also backed a measure passed by parliament’s finance committee making the language on the caps limit clearer.

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The finance ministry had sought to repeal the rate cap, arguing that it has cut private-sector credit growth as banks shunned lending to customers deemed risky, including small and medium-sized businesses.

The central bank, which has also opposed the caps, said that they had probably cut 0.4% from 2017 economic growth.

In March this year, the High Court ruled that the section of the law capping rates was unconstitutional and gave parliament a year to amend it.

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The ruling was issued in a case brought by a private citizen challenging the caps. An appeal against the ruling by a consumer group is pending before a higher court.

Lawmakers have started a separate amendment to banking laws to comply with the court’s ruling.

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“We are making certain amendments to make it compliant with the law,” lawmaker Chris Wamalwa said ahead of the section on rate caps being put to a vote by acclamation.

It is the second time the finance ministry’s request to have the caps removed has failed, after a similar move last year was rejected.

The next step after the parliament completes voting on the cap and other amendments to the budget is for them to be sent to the president, who will then approve or send them back to parliament, outlining any reservations he has.

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