Capping interest rates dangerous, says Central Bank of Kenya boss

Dr Patrick Njoroge, Governor Central Bank of Kenya. [PHOTO; WILBERFORCE OKWIRI/STANDARD]

The Central Bank of Kenya (CBK) has opposed a proposal by Parliament to cap interest rates terming it as a ‘dangerous development’.

While addressing journalists at his monthly press conference yesterday, CBK Governor Patrick Njoroge said the regulator is concerned that if the law sees the light of the day, it would have a negative effect on the economy.

“Capping interest rates will be harmful... the proposal will defeat its purpose because the people who will suffer most are the poor. It will also encourage the emergence of informal lending,” Dr Njoroge said.

The regulator says it prefers to use its own mechanisms, which are yet to bear fruit, to force commercial banks to lower interest rates. “People without a track record will not access credit. Non-price mechanisms and other fees will spring up,” he said.

He added that though commercial banks need to still be pushed to lower their lending rates, controlling rates would be wrong in trying to achieve the desired target.

“The lowering of rates remains unfinished business and we have been emphatic that commercial rates need to come down,” he said.

The stand taken by the regulator comes as a major relief for banks who have started lobbying Parliament to reconsider its position. Kiambu MP Jude Njomo has proposed a new law that if enacted will see interest rates charged by banks capped at four per cent above the benchmark rate published by the banking sector regulator.

CBK’s benchmark rate currently stands at 11.5 per cent and this means that if it was enacted today, borrowers would be charged a maximum of 15.5 per cent in interest. Banks currently charge as high as 22 per cent depending on the borrowers’ risk profile.

The proposed Banking (Amendment) Bill, 2015, which has been supported by a section of the population offers major relief to borrowers but makes it criminal for bank CEOs to exceed the prescribed ceiling. The current legislative proposal follows several past attempts, including the controversial Donde Bill that sought to regulate interest rates charged by banks but failed to go through.

“A bank or a financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent above the base rate published by the Central Bank of Kenya,” Njomo’ bill proposed.

The Banking (Amendment) Bill, 2015 also wants a bank or a financial institution to disclose to a borrower all the charges and terms relating to the loan before it is granted.

But what is set to upset banks more is the clause that seeks to reduce the interest rate spreads by forcing banks to pay depositors at least 70 per cent of the CBK’s base rate.

If enacted, the new law will deal lenders a twin blow, by squeezing them from the two ends they normally generate income. First, they will be stopped from charging high rates, but also the new legislation would force them to pay depositors better than what they now offer.