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September 20, 2018

MPs retain rate cap in proposed law changes

Central Bank governor Patrick Njoroge and chairman Mohamed Nyaoga before parliamentary Finance committee on the amendments regarding the banks interest rates caps law on April 12 /JACK OWUOR
Central Bank governor Patrick Njoroge and chairman Mohamed Nyaoga before parliamentary Finance committee on the amendments regarding the banks interest rates caps law on April 12 /JACK OWUOR

Lawmakers have defied calls by Central Bank, Treasury, IMF and Commercial Banks to scrap the law capping interest rates despite adverse effects it has had on private sector credit growth.

Parliament has instead proposed interest chargable by lenders be capped four per cent above the Kenya Bank Reference Rate.

This means although rates on commercial loans may be priced lower if the law is passed, banks will continue with the ongoing trend of locking out risky borrowers, increasing investment in government securities to meet revenue targets.

The new amendments also propose that earnings on deposits be based on the KBRR.

About a year and a half after the interest rate capping law came into effect pricing loans at four per cent above the Central Bank Rate, loan accounts have reduced by 1.2 million with credit to the private sector declining by Sh135 billion in 2017 alone.

A further drop in interest on credit may in turn lead to further reduction in loan accounts as well as the value of loans to individuals, small enterprises and the private sector at large as banks tighten lending conditions.

In its stakeholder submission, the Kenya Bankers Association stated the interest rate cap law is skewed to help the wealthy rather than cater to the common mwananchi classified as a risky borrower.

“This legislation has helped the wealthy who have more savings and disposable income; and also established businesses, and not Wanjiku,” the lenders’ lobby group stated.

On the other hand, lawmakers insist the amendments have been designed to ensure credit access across the economy, “especially among low income retail consumers and small and medium enterprises.

“This will ensure that there is minimisation of adverse impact on credit growth, financial access and monetary policy effectiveness,” the report on the consideration of the Finance Bill 2018 stated.

Should the amendments be passed into law, the KBRR will be reintroduced after it was suspended last January following the implementation of the rate cap law making it obsolete.

KBRR was introduced in July 2014, following discussions between commercial banks, CBK and the National Treasury. The formula was introduced as a benchmark rate to be set by the Central Bank for pricing all local currency loans or credit facilities.

The loan pricing tool is derived from the average of the lowest interest rate charged by Central Bank on loans to banks and the two month weighted average rate of three-month Treasury bills.

KBRR announced biannually by the Monetary Policy Committee stood at 9.87 per cent before it was scrapped.

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