VETO

Uhuru rejects retention of rate caps

The law has failed to meet its intended purpose

In Summary

•MPs have already rejected attempts by Treasury to push for a repeal of the law that ushered in rate caps twice

•One of the models being fronted to replace the rate cap law is to allow lenders to charge borrowers based on their risk profiles.

NATIONAL ASSEMBLY: MPs to control loan interests.
NATIONAL ASSEMBLY: MPs to control loan interests.

Borrowers could go back to the pre-interest rate cap regime where loans were priced as high as 35 per cent following President Uhuru Kenyatta’s rejection of the Finance Bill, 2019.

In a memorandum tabled in parliament yesterday, the president show  details his reason for rejecting the Bill that sought to retain the ceiling on commercial loan interest rates.

The President, who in August 2016 assented section 33B of the Banking Act (Cap.488) into law has now countered this decision arguing the rate cap law has damaged the economy.

 

“It is apparent that the capping of interest rates has caused unintended effects that are significant and damaging to our economy and in particular, the Micro, Small and Medium Enterprises (MSMEs) which are the hardest hit,” the memorandum stated.

This position has long been held by lenders, the Central Bank of Kenya, the National Treasury as well as the World Bank and International Monetary Fund. 

"The Government is also working with development partners who appreciate the shortcomings associated with the capping of the interest rates and are willing to support the Government in enhancing the targeted programmes," Uhuru said.

Intended to shield borrowers from interests charged on loans, amendments to the Banking Act were introduced by Kiambu Central MP Jude Njomo in 2016.

Data by CBK shows private sector credit growth fell from its peak of about 25 per cent in mid-2014 to 1.9 per cent in January 2018 — its lowest level reported last year.

Credit to the private sector which closed at 2.4 per cent last December has since grown to 6.3 per cent as at the September’s Monetary Policy Committee meeting.

 

 Kenya Bankers Association chairman Joshua Oigara said of the 40 million customers in the banking sector, only 15 million are borrowing as a result of the rate cap law.

“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.

Last year, banks’ net profits stood at Sh111.3 billion, growing 8.9 per cent from Sh102.2 billion profits made in 2016.

The growth was largely driven by banks increased investment in government securities, which according to data, has grown 51 per cent to Sh1.17 trillion between the end of 2016 and September 2018.

Meanwhile, loans to customers have grown at a slower pace of 8.4 per cent to Sh2.47 trillion over the same period.

In March, the High Court annulled the law but suspended enforcement for a year to allow MPS lawmakers review the legislation.

MPs have twice rejected attempts by Treasury to push for a repeal of the law.  However they need to raise a two-thirds majority to overturn Uhuru's memorandum and retain the cap.

In an interview with Bloomberg, CBK governor Patrick Njoroge said Parliament could agree with the president and amend the bill to remove the rate caps, or could decide to push the bill through.

“It’s very unlikely that they will come up with two-thirds of votes, so we believe that we are in a position, very soon, of overturning the interest-rate caps,” Njoroge said in an interview Wednesday in Washington, where he’s attending the annual meetings of the International Monetary Fund and World Bank. 

One of the models being fronted to replace the rate cap law is charge borrowers based on their risk profiles.