• The case followed a suit by two petitioners to have the rate caps lifted for stifling borrowing by SMEs.
• The National Assembly in 2016 amended the law to fix the amount of interest that banks could charge on loans and issue on customer deposits.
Image: FILE
Parliamentarians have begun talks on how to navigate through the interest rate caps riddle following a court ruling which gave the August House a year to end the row.
The case followed a suit by two petitioners to have the rate caps lifted for stifling borrowing by SMEs.
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.
Leader of Majority in the National Assembly Aden Duale has invited experts to bring their views to be factored in any possible amendments to the Banking Act.
The National Assembly in 2016 amended the law to fix the amount of interest that banks could charge on loans and issue on customer deposits.
However on March 14 this year, the High Court’s Commercial and Admiralty Division declared the law unconstitutional but gave a 12-month grace period before the ruling is enforced.
This was to give Parliament time to amend the disputed sections of the Act, work that Duale said would be among key businesses of the House.
“As one of the people who agreed to cap interest rates, I think it was important to listen to experts. Let us bring our proposals for review,” he said during a recent meeting of House leaders.
For his part, Minority leader John Mbadi asked the National Treasury to analyse the effect of the caps to ascertain to what extent the country has gained or lost business.
As much as we may not want to break the cap, we need to open it but at reasonable rates, say not exceeding 18 – 19 per cent.Budget Committee chairman Kimani Ichung'wa
The heightened calls for review of the rates followed an alarm by Kenya Institute for Public Policy Research and Analysis (Kippra) that a number of SMEs have either closed shop or are listed at the Credit Reference Bureau (CBD) as a result of the caps.
Benson Kiriga of the institute said the caps should either be removed or adjusted to accommodate the enterprises.
“We need to come up with credit guarantee schemes for the small enterprises so that they can be lent at sustainable rates,” he said.
In its review of the impact of the rate caps two years on, Kippra said economic growth as measured by real GDP decreased from 5.8% in 2016 to 4.9% in 2017.
“This is linked partially to the effects of poor weather conditions, prolonged electioneering period and a decline in growth in credit to the private sector,” the agency said.
Limited access to credit by the private sector is likely to reduce private sector investments, which can have adverse effects on growth, Kippra further warned.
The National Treasury, however, is of the opinion that the rate cap – heavily borrowed from South Africa, has not had an adverse effect on the economy.
“Banks still made historic profits despite the caps being in force,” Daniel Oloo, director of debt policy, said.
Kikuyu MP Kimani Ichung’wa argued that in the wake of banks making profits despite the caps, there is need to take a study of the situation ‘to find out who is punishing SMEs’.
Already, the government is in the process of creating a Micro-Small Enterprises Authority to provide credit to SMEs.
Trade Cabinet Secretary Peter Munya told MPs on Tuesday that the authority will see a fund created for small scale traders to access affordable credit.
“We are working on the regulations which will enable the government operationalise the agency which will have presence countrywide,” Munya said.
Kenya National Bureau of Statistics in the 2019 Economic Update revealed that private sector credit growth declined by half last year to 2.4 per cent compared to 4.4 per cent in 2017.
The World Bank is among financial institutions that have discouraged Kenya from enforcing the rate caps law saying it is constraining economic growth.