REPEALED

Interest rate cap to be repealed after lack of quorum in Parliament

The market is set to see a return of free-float interest rates

In Summary

•Only 161 members of the house showed up for the voting exercise, bringing short the two-thirds or (233) required to vote.

•In August the Kenya Bankers Association presented its proposal to the Finance Committee on the introduction of risk-based lending. The policy advocated for credit pricing based on individual risk.

The law capping commercial bank interests at four per cent above Central Bank rate has been scrapped, paving way for the return of free - float charges by lenders.

The retention of the law introduced in September 2016 was defeated due to a lack of enough members to vote against President Uhuru's memorandum.

Last month, President Uhuru Kenyatta submitted a memorandum to the Speaker of the National Assembly declining to assent Finance Bill, 2019 into law in an attempt to repeal the interest rate cap.

 
 

However, only 161 members of the house showed up for the voting exercise, bringing short the two-thirds or (233) required to vote.

This means that the legislature house will now take the proposal to President to assent to the law, heralding a possible return of free-float interest rates.

Loans accessed before will continue to be in force of the interest rates and duration as per the agreement before the repeal.

In the memorandum, Uhuru raised concerns that the cap had affected credit access to the private sector especially the micro, small and medium enterprises (MSMEs).

The credit crunch is estimated to have lowered the country's economic growth by 0.4 per cent in 2017 and by a further 0.2 per cent in 2018.

He also pointed out that the rate cap had affected lenders in a way of increasing their average loan size, weakening of the effectiveness of monetary policy and mushrooming of shylocks and other unregulated lenders in the market.

The need for repeal had married calls by various organizations including IMF, the Kenya National Chamber of Commerce and Industry, the Central Bank of Kenya and the National Treasury to repeal the rate cap law.

 

In August the Kenya Bankers Association presented its proposal to the Finance Committee on the introduction of risk-based lending. The policy advocated for credit pricing based on individual risk.

Even though the recommendation led by KBA chief executive Habil Olaka gave assurance of prudent operations toward consumers in the non-capped environment, some section of lawmakers said the risk-based policy would give room for the return of expensive loans.

The rejection of the 2019/20 financial year budget by Uhuru was followed by increased market activity at the Nairobi Securities Exchange driven by gains in large-caps bank stocks during the month of October.

According to Cytonn Investments, NCBA Group, Equity Group, and KCB Group, which share price gained by 30.7 per cent, 24.2 per cent, and 23.2 per cent respectively, owing to expectations of the repeal of the interest rate cap.

Before the cap, the total cost of credit was high at approximately 21 per cent per annum while the interest earned on deposits placed in banks was low at about five per cent per annum,

“Calls for capping interest rates were based on the high profitability in the banking sector because of high spreads between lending rates and deposits rates,” a weekly report by Cytonn stated.