The rationale used to arrive at four per cent as the maximum risk profile for borrowers has been questioned even as State House said on Sunday it is keenly following the debate on regulating cost of borrowing.
Capping interest rates at 400 basis points above the 10.5 per cent Central Bank Rate means lenders are allowed four per cent to cover for the perceived risk of default because CBR is a risk-free facility.
Banks have said while the average interest rates (at 18.2 per cent in June) are prohibitive, the risk profile of most borrowers is more than the four per cent in the the Banking (Amendment) Bill, 2015. The bill, overwhelmingly passed by MPs last Wednesday, is awaiting presidential assent amid strong opposition from President Kenyatta’s key officials in the financial services sector – National Treasury Cabinet Secretary Henry Rotich and Central Bank governor Patrick Njoroge.
The lenders, through the Kenya Bankers Association, have warned micro, small and medium-sized enterprises could be locked out of formal borrowing channels. This will hinder enterprise development, they have argued, since the MSMEs are the engine of Kenya’s growth.
“These borrowers will have to access the informal lending sector, including shylocks and other unregulated lenders, because the formal banking sector will not be able to accommodate them in view of the fact that the perceived risk of borrowing is higher than what can be accommodated within what is regulated ( 400 basis points above the CBR) within the law,” KBA chief executive Habil Olaka said.
Analysts at Cytonn Investments said putting the highest extra risk premium at four per cent was “unreasonable” and could lead to the emergence of shadow banking systems, which may result in inefficiencies when transmitting the effects of policy decision into the economy.
There are fears of about seven banks, which control approximately 70 per cent of cash, colluding to charge high interest on T-bills and bonds. NIC Bank CEO and KBA vice chair John Gachora termed as “genuine” fears the banks may invest in T-bills and bonds, instead of lending to businesses.
"Big corporates and rich people are able to access money at very cheaper rates. ( For) those who, unfortunately, are paying those high rates, the solution will not be that the rate will come down but they will be excluded,” Gachora said. “The rate that is being treated as a cap is comparable to the rate one will get if they just put their money in treasuries.”
Six top-tier lenders have in the recent past come under public sharp scrutiny for keeping interest rates high to protect profit margins.
Standard Chartered Bank had the lowest average interest rates at 17.2 per cent in June from 17.9 per cent in March.
KCB, the largest by value, raised its average interest rates to 17.3 per cent from 16.1 per cent in June.
The assessment by the regulator show that Co-operative Bank reduced its rates to 17.4 per cent from 17.5 per cent over the review period.
Kenyatta family-owned Commercial Bank of Africa, which replaced CfCStanbic in the tier-one league based on 2014 statistics, charged 18 per cent from 18.3 per cent in March.
Kenya's largest bank by market value, Equity Bank, raised its rates to 19 from 18 per cent, while Barclays' rates also went up to 19.2 per cent – the highest among tier one banks – from 18.8 per cent.