LAW REVIEW

Repeal the rate cap law to boost small businesses - Oigara

In Summary

• Of the 40 million customers in the banking sector, only 15 million are borrowing.

• Banks have been accused of hiding behind SMEs to review the cap so that they can go back to making these supernatural profits.

KCB chief executive Joshua Oigara on March 2
KCB chief executive Joshua Oigara on March 2
Image: ENOS TECHE

Banks, which have lost over 1.5 million customers in the last three years say a repeal of the law capping interest rates on commercial loans would not only benefit them but ensure small businesses can access credit.

Speaking to the Star, KCB Group managing director Joshua Oigara said of the 40 million customers in the banking sector, only 15 million are borrowing.

“Why are we forgetting the remaining 25 million customers? The truth of the matter is that we can’t price small enterprises with the current cap,” he said adding that banks would continue to make profits regardless of whether the law was reviewed or not.

 

“Banks are pushing for the repeal to bring more and more small businesses to get credit because that is the key problem today,” he said.

Last week, during public memoranda submissions on the Finance Bill 2019 to the National Assembly's Finance Committee, the Institute of Certified Public Accountants of Kenya (ICPAK) called on MPs to retain the law in its original form.

The accountants argued that the law had not affected banks and the banking industry, which continue to report huge profits, adding that a repeal would allow banks to make “supernormal” profits.

“When the law came into place, banks said they would make losses but three years later that narrative has been proved wrong. Numbers don't lie, we have seen them continue making profits,” ICPAK's -public finance committee chairman Philip Mwema said.

“Capping has cushioned borrowers from agreeing to interests that they would finally default,” he said.

During the submissions, banks were accused of hiding behind SMEs to review the cap so that they can go back to making these supernatural profits.

Oigara, however, said lenders were not trying to go in and punish customers because of credit adding that there was the need for closure that is amicable, but that the rate cap is not achieving that objective.

 

“We want to lend to the enterprises but the challenge for banks today is if I lend you Sh100 only Sh90 will come back and for micro-enterprises only Sh85 will come back, so if I lend at 13 per cent I will have to go back to my pocket to top up the remainder and that does not work,” Oigara said.

During the public participation forum committee chair and Kipkelion East MP Joseph Limo supported a review of the law.

Limo is in support of Gatundu South MP Moses Kuria's proposal to have SMEs and unsecured individual borrowers allowed by law to negotiate risk-based interest rates above the normal cap.

In his proposal to the speaker of the National Assembly Justin Muturi, the legislator said the risk negotiation window should be up to six per cent above the lending cap for SMEs.

“Can we look at the different interest rates for the different groups? We can have low, middle and high-risk borrowers. There is a full force to remove and a full force to retain and if we push and pull each other, we will have a stalemate,” Limo said.

Oigara said increasing the spread to have a graduating price model would begin to address the problem.

“The solution will be in the risk pricing model for banks and that I think is what Moses Kuria is trying to address,” he said.

“Maybe the end result is somewhere in between the current cap, a total repeal or a middle ground. We have to be open for any possibilities,” Oigara added.