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Tread carefully on Kenya’s bank lending rates

By The Standard | July 30th 2016

NAIROBI: Kenya’s banking sector is one of the most profitable, and yet borrowers have not readily benefited from its expansion. This has no doubt triggered events of the last few days where MPs presented for presidential assent the Banking (Amendment) Bill 2015 which seeks to put a cap on lending rates.

The populist emotions this Bill has generated should not be lost on banks which have resisted repeated attempts to reduce lending rates to the satisfaction of most of their customers.

Although there have been a host of regulations to bring interest rates down, banks have not moved fast enough to allow their customers to share in their prosperity.

However, capping interest rates goes against the tenets of a free market economy. And if the Bill is assented to, rates could fall to as low of 14.5 per cent. This may be counterproductive, especially if banks are forced to cherry pick borrowers, and in the process deny the very people that need financing.

But if the banks feel unfairly targeted, they have themselves to blame. The agitation for banks to act is in sync with the public mood. If the Bill is not assented to, and legislators are persuaded to redraft the Bill and drop their proposal, banks must take this as a warning shot and act to reduce the cost of credit.

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