Consumer protection is a good thing. But I’m quite confused by the new proposal coming out of the treasury to set up the Financial Markets Conduct Authority (FMCA). Not only is this confusing in itself: It’s a bit of an overkill since you could improve consumer protection with some amendments to the current constellation. And CBK governor Patrick Njoroge is also not keen on this as the seeming duplication of institutions would also undermine the position of the Central Bank of Kenya.
But more baffling is the fact that this proposal, while extensive, does not seem to do anything to address the interest rate cap, and does not offer a repeal of this mechanism. Not only has the interest rate cap had a confusing effect on monetary policy implementation, but it has also, as contradictory as this sounds, been bad news for people and companies looking to borrow: When lending, banks put a price on this service: the interest. The riskier a client is perceived, the higher the price, i.e. the interest rate – because a higher risk means that there is a higher chance that this client will not repay. Across the overall portfolio of loans, this will even out: some will not be repaid, and those losses are, very simply speaking, covered by the higher interest. Yes, banks in Kenya have made good money. And no, an interest rate cap is not the way to go.
We’ve seen a significant decline in lending to the private sector: especially those asking for unsecured loans, especially individuals asking for loans, especially SMEs. This is not entirely the fault of the interest rate cap – it’s also the fault of the government which has borrowed substantially in the local market to fill its consistently large budget deficits: A bank, offered the option of a risky loan to a smaller client or the option of lending to government at much larger sums and much lower risk, will go for the latter.
The government should not have waited until put on the spot by the IMF. In fact, the president should have never signed this bill because he knows better. But he did it anyway – to be able to keep the financing costs for the government’s unending spending sprees low? It is pretty obvious that Kenya will have to address its massive fiscal deficit, its spending, its surging debt. And to make sure that bank lending returns to SMEs, which is unlikely to happen while the interest rate cap is in place. That whole FMCA? Fiddling while Rome burns ‑ and a collision course with the IMF with respect to their emergency overdraft facility. Time to get serious.