• The National Assembly will need to raise a two-thirds majority to overturn Uhuru's memorandum and retain the cap which was introduced on September 14, 2016.
• Uhuru gave five reasons why the interest cap which requires banks to lend at a uniform rate should be done away with.
President Uhuru Kenyatta has vetoed the decision by MPs to retain the interest rate cap in the Finance Bill, 2019.
In a Memo sent to Parliament, Uhuru rejected the Finance Bill asking the lawmakers to repeal section 33B of the Banking Act.
The National Assembly will need to raise a two-thirds majority to overturn Uhuru's memorandum and retain the cap which was introduced on September 14, 2016.
Should they fail to raise the number, Uhuru's veto will carry the day removing the cap which has been criticised by bankers and some economists.
Uhuru gave five reasons why the interest cap which requires banks to lend at a uniform rate should be done away with.
Uhuru said the cap has led to a reduction of credit to the private sector, particularly Micro, Small and Medium Enterprises.
"Most commercial banks adjusted their lending business models towards large corporates and the public sector and away from small-scale borrowers and individuals," Uhuru said.
He added that a study by Central Bank of Kenya showed that rationing out MSMEs from the credit market by commercial banks 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.
Uhuru also noted that the interest cap had led to the weakening of the effectiveness of monetary policy, with evidence of perverse outcomes making CBK less effective in dealing with economic shocks and delivering on its mandate.
"Studies indicate that the lending activity of smaller banks reduced with outstanding stock of credit declining by about 5 per cent in the 12 months ending September 2017," Uhuru listed his fourth reason why the cap needs to be scrapped.
He added; "Small banks have been disproportionately hit by capping due to their different business model of relying more on higher-risk/higher-return borrowers such as MSMEs."
The President also noted that the cap had led to the mushrooming of shylocks and other unregulated lenders in the financial sector.
He noted that the government and the banks have since the introduction of the cap initiated and implemented programmes and measures aimed at supporting greater access to affordable credit to the vulnerable sectors.
"The Government is also working with development partners who appreciate the shortcomings associated with the capping of the interest rates and are willing to support the Government in enhancing the targeted programmes," Uhuru said.
He concluded the memo by stating the capping of interest rate has not addressed the intended objective particularly expanding credit access.
The President noted that it was this that prompted the proposal under Clause 43 of the initial Bill to repeal section 33B of the Banking Act.
"However, their re-introduction through Clause 45 of the Bill as passed by Parliament, will not only reverse the gains so far made but also exacerbate the unintended effects alluded to," Uhuru said.