RATE CAP

Why banks setting interest rates is good for Kenya - Duale

Duale said the capping Bill of 2016 has negatively affected the economy.

In Summary

• Duale said the introduction of the cap has slowdown the private sector credit and that small banks have experienced a significant decline in profitability.

• He said the President's move towards the removal of the cap rates will go a long way in increasing access to credit by allowing the expansion of the economy.

President Uhuru Kenyatta signs the equalization fund and Supplementary Appropriation Bills into Law at State House, Nairobi.
President Uhuru Kenyatta signs the equalization fund and Supplementary Appropriation Bills into Law at State House, Nairobi.
Image: PSCU

The National Assembly failed to raise simple majority members on Tuesday to reverse President Uhuru Kenyatta's recommendations on the interest rate cap.

The President rejected the 2019/20 budget demanding that lawmakers remove a cap on commercial lending rates.

The Assembly was to raise a minimum of 233 members, of which only 161 members were in the House when they were about to vote.

 
 
 

This meant that the President's recommendations went through unopposed.

The Majority Leader in the National Assembly Aden Duale has embraced President's recommendations highlighting ten reasons to justify the move.

In a statement, Duale said that the Banking (Amendment) Bill, 2016 which was introduced in Parliament by Jude Njomo, M.P. in 2015, following concerns over the high cost of credit in Kenya, had made it difficult for some segments of the population to access credit.

Duale said that there was a perception that banks were making a significant profit at the expense of the citizenry.

He, however, said that there is a general misconception among the public and the MPs that banks may have conspired to ensure that interest cap policy does not work

Duale added that financial institutions were not in support of the cap policy from the beginning.

"If there is any form of a conspiracy among these institutions to defeat this policy, then the banks will have done a great injustice to this country & they will be judged harshly. As leaders, we shall be monitoring closely the action of Banks," Duale said.

 
 
 

He said the President's move towards the removal of the cap rates will go a long way in increasing access to credit by allowing the expansion of the economy.

In his memo to the House, the President had noted that the interest cap had led to the weakening of the effectiveness of the monetary policy.

He added that expansion of the economy will create employment which will enable the government to raise additional revenue from the increased productivity.

The Majority Leader said the financial sector plays a big role in the economy, particularly with respect to the mobilisation of savings and provision of credit.

Through the interest rate capping in 2016, it was expected that credit access will expand to reach more consumers; provide savers with a modest return on their deposits as well as protecting consumers of loan products from abusive lending practices.

He said research has indicated that the capping Bill of 2016 has resulted in undesirable effects that have affected the economy negatively.

"According to the economic survey 2019, the financial activities which is one of the sources of economic growth has recorded decline since the introduction of interest cap, from 6.5% in 2016 to 4.6% in 2018," Duale said.

The Garissa Township MP said the impact on the financial sector has negatively reduced the economic growth.

"Recent research done by CBK, on the impact of the capping of the interest indicates that this policy has resulted in negative effects," he said.

Duale that the introduction of the cap has slowdown the private sector credit and that small banks have experienced a significant decline in profitability.

He added that rate caps hindered CBK's role of utilising CBR as a tool to stimulate growth.

"This implies that the CBK has not played its role well due to the limitations brought about by the interest rate cap," he said.

Duale said CRB’s role should be strengthened to enhance the credibility and reliability of the credit score as a tool for enhancing access to credit, promoting competition, and improved market efficiency.

According to Duale, rate caps constrained SME’s access to credit which impacted on job creation, hence declining revenue performance and economic growth

The Majority leader has further alluded that high-interest rates are the large appetite of government borrowing in the domestic market.

" The continued domestic borrowing concentrates resources to the public sector while leaving little for the private sector including SME’s," he added.

He asked the Budget and Appropriations committee to offer the necessary leadership in slowing down the level of domestic borrowing.

Duale has also asked the Finance Committee of the National Assembly which oversights the CBK to oversight the regulatory work of the CBK as regards bank supervision in order to ensure that the Commercial banks do not exploit consumers after the removal of the interest rate cap.