Treasury dismisses MPs’ move to cap interest rates as cosmetic stunt

Treasury Cabinet Secretary Henry Rotich. [PHOTO: JONAH ONYANGO/STANDARD]

The Government has dismissed the move by legislators to cap interest rates as a ‘cosmetic’ stunt that will barely address the root cause of the problem.

National Treasury Cabinet Secretary Henry Rotich said that unlike members of the National Assembly, the Government has for the last five years been working on ways of bringing a lasting solution to the issue of high interest rates that had made life unbearable for most Kenyans.

Rotich said that since 2013, the Government had come up with a raft of measures aimed at reining the runaway cost of lending. Since then, the Jubilee administration has come up with measures that will eventually relieve consumers of the heavy burden of borrowing.

The idea of Kenya Banker Reference Rate (KBRR), he said, is one of the recommendations of these deliberations of reforming the interest rate regime. “Next area of reform was what margin should be charged. Whereas the margin should be risk-based, banks continue to define the way in which they calculate the additional cost beyond the Kenya Banks’ Reference Rate (KBRR),” he said.

Moreover, Rotich said the Government will cut borrowing from the domestic market. Domestic borrowing has always resulted into high interest rates for the private sector. He said Treasury was working on a number of Bills that are aimed at lowering the cost of lending. One of the Bills seeks to protect consumers from exploitation by financial service providers while the other one will allow borrowers to use movable assets as collateral.

“These are the solutions premised on why the interest rates are high rather than second-based solutions like controlling and all that,” said Rotich who took issue with the basis on which MPs were capping the price of borrowing. MPs recently passed a Bill that will see interest rates that banks or financial institutions charge on loans capped at not more than four per cent of the prevailing Central Bank of Kenya rate, which currently stands at 10.5 per cent.

Should the President assent to the Central Bank (Amendment) Bill 2016 borrowers will start enjoying interest rates of as low as 14.5 per cent, a huge relief for some borrowers who have had to part with as much as 25 per cent.

But Rotich warned that such benefits may not last long. “Coming up with an artificial interest rate and saying: ‘this is what the rate should be’ is very challenging because, first, how do you know the prevailing price in the economy?”

Positive credit history

He added, “Interest rate is the price of money, just as the price of this chair,” he said pointing to a chair. “If tomorrow you said this chair is supposed to cost two shillings, you will not see it in the market because it does not cost two shillings.”

“Our approach is different. Our approach is to attack the root cause of the problem, not secondary solutions,” he added. However, most of these reforms are yet to be implemented as some of the bills have not even been debated in Parliament.

Moreover, he said that the Government would soon start pushing for banks to start to use Credit Reference Bureaus (CRBs) not only as a means to look for credit defaulters but also borrowers with positive credit history. The latter can then enjoy better interest rates.

CRBs will now ensure credit scores for all individuals can be priced according to their credit worthiness. To this end, CRBs will publish both positive and negative information to help banks give favorable rates to reliable borrowers.

On Tuesday, banks through a memorandum of understanding proposed to immediately reduce interest rates charged on loans by 100 basis points in what some interpreted as a move to dissuade the President from assenting to the Bill. They also set aside Sh30 billion for lending to woman and youth at favourable interest rates.

However, Members of Parliament said the move was unreliable since it was not grounded on any legal basis. They asked the President not to fall for what they thought were antics by financial institutions.

Financial Service Authority Bill (FSA) proposes, among other things, to protect consumers from exploitation by financial service providers when they are applying for a loan.

“The FSA Bill has the issue of consumer protection in the financial service, or what you call market conduct,” he said noting that this will regulate the financial sector to ensure that borrowers are not exploited when they sign their loan contracts. He said 90 per cent of collateral used is land which has prohibited a lot of people from getting financing.

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