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MP in plan to cap loan rates

FINANCIAL STANDARD
By Jackson Okoth | July 14th 2015

There have been concerns that local interest rates, which determine the cost of accessing credit, are at overly high levels compared to global banking markets.

This has left bank customers in Kenya with existing loan facilities, debit or credit cards, or mortgages burdened with huge repayments. The situation is set to get worse as commercial banks adjust their base rates upwards to reflect the recent increase in the Central Bank Rate (CBR)— the price at which the Central Bank of Kenya (CBK) lends to other commercial banks.

At its recent monetary policy meeting, CBK increased the CBR from 10 per cent to 11.5 per cent, with the Kenya Banks’ Reference Rate (KBRR) revised to 9.87 per cent from 8.54 per cent.

Grave concern

The increase in the cost of loans is expected to impact negatively on the whole spectrum of the economy, from household incomes to private sector credit.

To address this, Sirisia MP John Waluke is sponsoring the CBK (Amendment) Bill, 2015.

“It is a grave concern that today, Kenya’s interest rates, which range from 12-24 per cent, are the highest in the East African region. This is compared to rates in Japan, UK, China and the US, which while liberalised, do not average more than 5 per cent,” he said.

The main objective of the Bill, he said, is to harmonise the cost of lending and borrowing in the banking sector to ensure interest rates reflect market conditions.

“The intention is to make the CBR the benchmark rate for interest rates prevailing in the financial industry. The imposition of this requirement means that the spread on interest rates may not exceed 5 per cent of the published CBR,” the MP said in a memorandum.

“The CBK is to ensure that banking and other financial institutions adhere to this provision.”

The Bill proposes to put a limit on premiums charged above the CBR. The current law requires CBK to publish and publicise the lowest rate of interest it charges on loans to banks and microfinance institutions (which is the CBR).

“Many Kenyans have suffered enormous and irreparable damage when banks have auctioned, closed their businesses, and caused them irreversible psychological and mental anguish,” said Maj (Rtd) Waluke.

Financial inclusion

However, banks view the attempt to curb interest rates as a drawback on financial inclusion.

“When the CBR is increased as monetary authorities deal with inflationary pressures in the economy, this sends a signal for banks to also adjust upwards their lending rates,” said Habil Olaka, the CEO of the Kenya Bankers Association (KBA).

“Thus, borrowers with loan facilities that have a floating rate will have their loan repayments adjusted upwards. Then there are those banks that have increased the loan repayment period to accommodate the increase in the KBRR.”

Customers have already begun receiving messages on pending revisions to their loan repayments after the latest interest rate hike.

“Dear customer, as a result of the KBRR increase, effective August 8, your loan repayment period will increase”, read a text message from one of the leading commercial banks to a customer servicing an unsecured loan facility.

KBA warns that an attempt to legislate the amount of interest rate a bank can charge for any loan facility could be counterproductive.

“What will happen is that banks will engage in credit rationing and avoid high-risk borrowers who cannot be accommodated within the risk margin that is being placed on the bank,” said Mr Olaka.

“On the list of some of the high-risk products that banks might end up discontinuing is the unsecured loan, which is usually pegged on a salary and not any collateral. We would have reversed all the gains we have made in providing credit to those without collateral.”

Banks, he added, would be forced to only deal with customers who fall within the 5 per cent risk premium proposed by the amendment to the CBK Act.

“I do not think the proposal to curb interest rates charged by banks is the best way forward. A uniform cap on lending rates would not work, considering that lenders face different costs of risks as well as different costs of funding,” said Faith Waitherero, an analyst at Standard Investment Bank (SIB).

“Such a situation would benefit the large banks, which have economies of scale and hence cheaper cost of funds, but would hurt the small banks and microfinances that rely on expensive deposits for funding.”

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