• Bankers welcomed the proposal saying it will help to unlock clogged credit market especially to the private sector.
• Rotich said the law introduced in 2016 to cap interests at four per cent above Central Bank rate had failed to achieve its purpose.
Treasury CS Henry Rotich once again proposed repeal of the law capping rates, piling more pressure on the Parliament to allow banks to go back to free float interest regime.
Speaking when he presented the 2019/20 budget in Parliament yesterday, Rotich said the law introduced in 2016 to cap interests at four per cent above Central Bank rate had failed to achieve its purpose.
‘’It is now going to three years and the law has had the opposite effect with micro, small and medium enterprises (MSMEs) starved of credit and the loan books of small banks becoming smaller,’’ Rotich said.
He said that his proposal in the Finance Bill, 2018, to do away with the interest cap law stands and is motivated by the need to enhance access to credit.
‘’I proposed to amend the Banking (Amendment) Act, 2016 by repealing section 33B of the Act. This is motivated by the need to enhance access to credit and minimize the adverse impact of the cap and strengthen monetary policy effectiveness,’’ Rotich said.
Treasury chief added that Central Bank of Kenya is dealing with consumer protection issues in the banking sector.
His pronouncement on the issue has reinforced High Court ruling that declared the interest cap law unconstitutional in mid March.
It however did not immediately suspend the law but gave a 12-month window period for Parliament to reconsider provisions.
The petition by Bonface Oduor involved seeking to establish the constitutionality of the provisions of the Banking (Amendment)Act No. 25 of 26, which introduced section 33B into the Banking Act
The court found the provision of Section 33B (1) and (2) of the Banking Act to be vague, imprecise, ambiguous and indefinite.
The Parliament is now racing against time to comply with the court order, failure to which the interest cap law will become null and void in March next year.
Even though Rotich gave assurance that CBK will protect borrowers from being exploited by banks, he did not give possible policy to implement the same.
He however hinted about the launch of an SME Credit Guarantee Scheme in a few weeks time, to deepen access to credit to the sector without being subjected to complex application procedures and collateral requirements.
‘’This together with Biashara Kenya Fund and SME Fund will address the very reason why interest rate caps were introduced,’’ Rotich said.
Yesterday, bankers welcomed the proposal saying it will help to unlock clogged credit market especially to the private sector.
Director of research and policy at Kenya Bankers Association (KBA) Jared Osoro told the Star that the proposal to repeal the law confirms that it is not working as expected.
‘’Interest cap law is a distortion that does not allow cash flow to SMEs. Its real is welcome,’’ Osoro said.
Both the government and banks are silently pushing for risk based pricing of interests, where borrowers use their credit scores to negotiate with lenders.
Early this month, the International Monetary Fund (IMF) cautioned Kenya against adopting risk based lending, saying it provides loopholes for exploitation of borrowers.
It suggested a ceiling at a rate high enough to facilitate lending to higher-risk borrowers.