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Capping lending rates disastrous for economy, banks say

By Moses Michira | July 29th 2016
Kenya Bankers Association CEO Habil Olaka

Banks have staged a frantic fight to block the hugely popular move by Parliament to cap lending rates.

In a meeting called only hours before the National Assembly passed the critical amendments, banking executives warned that using the law to regulate interest rates would be tragic for the wider economy.

"This move will lock out many people and limit access to banking," said Habil Olaka, the chief executive of Kenya Bankers Association.

His resistance was, however, anticipated since the amendments, which will become law if President Uhuru Kenyatta assents to the Banking (Amendment) Bill, 2015, could slash the lending rates by up to half.

"It is bad for everyone," Olaka added, echoing sentiments from across the banking sector. Interest on loans are currently between 20 and 30 per cent, after factoring all costs, but the amendments would cap the price at no more than 14.5 per cent.

"The disease is well diagnosed but the medication is absolutely wrong," said John Gachora, the managing director of NIC Bank and vice chairman of the bankers' lobby.

Mr Gachora referred to high interest rates as the disease that has afflicted the Kenyan population, and that bankers like him appreciated as much.

He said Zambia and several West African countries are proof that regulating interest rates would be disastrous for the economy.

MPs were, however, clear on their intent to rein in on what they term as 'rouge' banks that fleece the public.

It turned out to be a Bill that sailed through Parliament without any resistance, according to its sponsor Kiambu Town MP Jude Njomo. Several legislators have personal interest in the matter, according to bankers, a factor that informed the stand.

The amendments passed through the final stage of legislation on Wednesday, sending banking sector into turmoil.

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