Borrowers are likely to pay more for loans after President Uhuru Kenyatta on Thursday refused to assent to the Finance Bill 2019.
President Kenyatta returned the Bill to Parliament, and instructed legislators to remove a section that introduced the capping of interest rates.
The decision means the country has come full circle three years after Uhuru signed the Banking (Amendment) Bill, 2016 into law, effectively capping the interest rate at not more than 4 per cent above the Central Bank of Kenya (CBK) benchmark rate.
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Back in 2016, the President said he felt the pain of borrowers who had for long been left at the mercy of banks that appeared to set their interest rates on a whim.
“These frustrations are centred around the cost of credit and the applicable interest rates on their hard-earned deposits. I share these concerns,” the President had said.
But Uhuru has since retreated on this position. He defended his actions, saying the rate cap had failed to live up to its expectations.
“The purpose of the capping was to address the wide concerns about affordability and availability of credit, especially to the common mwananchi,” said the Head of State in a memo to Parliament.
He continued: “There was also a perception of the insensitivity of banks to customer needs. However, it is apparent that the capping of interest rates has caused unintended effects that are significant and damaging to our economy, and in particular the Micro, Small and Medium Enterprises (MSMEs) which are the hardest hit.”
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Uhuru also said the rate cap had rendered the CBK ineffective, even as the economy took a beating, which has been attributed to the throttling of credit flow to the private sector.
“Most commercial banks adjusted their lending business models towards large corporates and the public sector, and away from small-scale borrowers and individuals,” he said.
Banks have maintained that the rate cap has taught them a lesson and promised to practise restraint if it is removed.
Legislators, however, do not think their word can be trusted. With the current CBK benchmark lending rate standing at 9 per cent, banks have been charging borrowers a maximum of 13 per cent.
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The latest push to remove the rate cap comes after a persistent campaign by banks, the CBK, the World Bank and the International Monetary Fund.
Members of Parliament had rallied behind borrowers when they rejected a proposal by suspended National Treasury Cabinet Secretary Henry Rotich to repeal Section 33B of the Banking Act, which caps the interest rate.
The lenders, through their lobby, the Kenya Bankers Association, had assured MPs that they would not revise interest rates on existing loans should the cap be removed.
Nonetheless, the sceptical MPs went ahead and retained the ceiling.
CBK Governor Patrick Njoroge had already let the cat out of the bag when he revealed to an international news agency that the President had refused to assent to Finance Bill due to growing reservations that the twin objectives of the law – affordability and accessibility of credit – had not been met.
Dr Njoroge said that banks had in the last three years initiated programmes that would help extend credit to SMEs.