Rotich renews drive to remove interest rate cap

In Summary

• Since its introduction in 2016, the rate cap has seen bank lending reduce by over 1.2 million loan accounts.

• Private sector credit growth declined last year to 2.4 per cent compared to 4.4 per cent in 2017.

Treasury CS Henry Rotich
Treasury CS Henry Rotich
Image: FILE

The government plans to renew efforts to do away with the law capping interests on commercial loans.

During the launch of the 2019 Economic Update by the Kenya National Bureau of Statistics, Treasury CS Henry Rotich said there was urgent need for the review of our interest rate cap regime.

This was after the survey revealed private sector credit growth declined by half last year to 2.4 per cent compared to 4.4 per cent in 2017.

 

“We need to deal with the challenge of interest rate capping,” he said.

Commercial banks had been charging Kenyans as high as 35 per cent interest on loans prior to the rate cap. The high charges drove government to intervene by introducing the law putting interest on loans at four per cent above the Central Bank base lending rate.

The amendments to the Banking Act were introduced by Kiambu Central MP Jude Njomo through a Private Member’s Bill that was signed into law in August 2016.

This has since been met with rejection, not only from the banks but also from a section of members of parliament and the Central Bank of Kenya as the law did not meet its intended purpose.

Despite good intentions, the rate cap law has ultimately hurt low-income populations by limiting their access to finance and reducing price transparency.

Since last year, the state has been pushing for banks to charge borrowers based on their risk profiles in its proposed amendment to the law capping interest rates.

The new model backed by CBK would be based on the adoption of customer-centric business models by banks, risk-based pricing of credit, enhanced transparency and information disclosures and entrenching an ethical culture in banks.

At the beginning of the year, Gatundu South MP Moses Kuria proposed to revise the 2016 Banking (Amendment) Act to provide a risk negotiation window of up to six per cent above the lending cap for SMEs while retaining the four per cent ceiling.

A similar move to repeal or amend the act was however rejected by the National Assembly in August last year during the heated debate on the Finance Act, 2018.

Since its introduction in 2016, the rate cap has seen bank lending reduce by over 1.2 million loan accounts and SME finance drop by more than Sh13 billion.