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Tread carefully on issue of capping interest rates

KAMOTHO WAIGANJO
By Kamotho Waiganjo | August 7th 2016

I am not an economist. In the course of life however, I have interacted with enough economists and economics to understand slightly more than the difference between macro and microeconomics. For one, I definitely understand that economic challenges do not lend themselves to straightforward one-track solutions. For this reason, I am wary of the Jude Njomo Bill, which purports to fix the high interest rates problem by capping interest and deposit rates by law. This Bill, and the philosophy that informs it, are not new.

Last year Gem MP Jakoyo Midiwo made a similar attempt, which came a cropper courtesy of constitutional technicalities. But the father of this philosophy is undeniably Joe Donde, who was interestingly also an MP for Gem! Donde single handedly forced the banks to reign in their gluttonous behaviour. He went on to form the Interest Rates Advisory Centre which for several years was the “must go to” place for struggling borrowers. Most Kenyans are not aware that many banks quietly refunded their customers millions in wrongly charged interest courtesy of this great Kenyan.

When I borrowed my first loan as a young lawyer to purchase a property, which interestingly I bought on auction, the interest rates at one point soared to 42 per cent and I almost threw in the towel. I was just lucky to be an early beneficiary of the Donde initiative otherwise my house would have ended on the auctioneers block. Post-Donde, Kenyans banks largely subdued their voracious behaviour assisted also by a stronger economy after the NARC takeover in 2002. At some point, interest rates went as low as 10 per cent and the long lists of properties on auction reduced until about a little while ago when the dark days of defaulting borrowers threatened to stare at Kenya again. Currently the average lender is giving out loans from between 18-25 per cent interest, which is unsustainable for many borrowers. The same banks are taking deposits at 10 per cent interest and less. To me and the rest of the layman community, these simple numbers talk of greed and need for strict regulation by law. My concern however is that the Njomo Bill, while dealing with this very real problem is attacking the symptom while leaving the substantive problem unattended. I am informed by those in the know that several factors determine the rates at which banks borrow. These include the cost of money, including the impact of the Cash Reserve Ratio, that part of the bank’s funds that it must keep as cash deposit that cannot be lent out, the competing markets for the banks’ money, including government’s own voracious demand for cash, the efficiency of the credit rating process and the cost and ease of collecting on defaults including the efficiency of the court process. It also includes the relative risks that each customer is assessed by with more risky customers attracting higher interest.

Currently many of these determinants of the rate of borrowing are prejudicial to banks. The minimum cash reserve ratio is high and many banks have struggled to sustain it. The Government continues to borrow at high interest rates with relatively low or no risk. The credit rating system is still at infancy. The process of debt collection is lethargic and an absolute nightmare if one has to go to the courts.

While the idea of capping rates through law is attractive, failure to address these other more substantive issues make it insufficient. Even more dangerous, the imposition of fixed low lending rates may end up only assisting people who already have loans but prejudice new borrowers who the banks consider even medium risk.

In those circumstances, and for as long as the Government continues its appetite for cash, the banks will distribute their lending between government and low risk borrowers which could prejudice most small and medium borrowers and the economy generally.

While Njomo, and Midiwo before him, must be congratulated for seeking to solve that which the government in its management of the macro-economy has neglected to do, he may in solving one problem open a more grievous one.

So while my instincts would urge the President to assent to the Bill, I find myself hesitant if the Bill is a stand-alone action without resolving the more fundamental challenges.

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