Deputy President William Ruto has ruled out a review of interest controls law in the near-term, trashing calls by, among others, the IMF and the World Bank Group.
Economists at the International Monetary Fund and its sister company, the World Bank, have led a growing chorus for review of the the Banking (Amendment) Act, 2016 since January.
“Our position is that the financial institutions we have in Kenya should cut down on their fat, they should cut down on their expenses (and) they should change their business model. ” Ruto said during an interview on Citizen TV on Tuesday evening. “It is possible. It happens everywhere in the world, there’s no reason it cannot happen in Kenya.”
The amended law, enforced on September 14, capped loan charges at four percentage points above the prevailing 10 per cent Central Bank Rate and put a floor of 70 per cent of the CBR on interest paid on term deposits. The legislation was meant to help micro- and small-sized enterprises – the drivers of Kenya’s growth – access affordable credit, but has largely been seen as counterproductive.
“Although the adverse effects of the controls are manageable in the near term, if maintained, they could potentially pose a risk to financial stability,” IMF deputy managing director Tao Zhang said on January 26. “Therefore, it is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency of the banking sector.”
The cap on interest charges have largely been blamed for continued slowdown in lending to the private sector which started late 2015, initially because of rising bad loans amid tighter regulations on loan loss provisions.
The World Bank on April 12 slashed Kenya’s growth projection for 2017 by 50 basis points to 5.5 per cent. The multilateral lender largely cited slower growth in loans to the private sector for the downgrade.
“Kenya faces a marked slowdown in credit growth to the private sector. At 4.3 per cent, this remains well below the 10-year average of 19 per cent and is weighing on private investment and household consumption,” the multilateral lender said in Economic Update report for Kenya.
The Central Bank’s Monetary Policy Committee said after their meeting on March 27 that growth in private sector credit had stabilised at 4.5 per cent, a marked reduction from about 17 per cent in December 2015.
“Yes there has been a slowdown partly maybe because there is expectation that there will be change of policy,” Ruto said on Tuesday. “But I am sorry. If that is what was being sought, that is not going to come any time soon.”
Equity Group, the largest lender by deposit accounts, on March 15 blamed its 4.56 per cent per cent drop in net profit for 12 months through December 2016 largely on the interest controls and default on loan by large enterprises.
“We believe that it is possible to do business even with interest rates as low as 10 (per cent),” the deputy president said. “So, it is unjustified for anybody to tell us that at 14 per cent, which is currently the rate, there is any serious institution that cannot do business.”
Treasury CS Henry Rotich and Central Bank governor Patrick Njoroge – who both had opposed the enactment of the rate cap – in March pledged to investigate the impact the amended law has had on borrowing. The survey will inform next course of action by the government on the rate law.