MPs UHURU SHOWDOWN

Lifting interest cap will reduce borrowing cost

In Summary

• Borrowers have been forced to go to digital lenders and loan sharks that charge up to 200 percent interest.

• Since 2016 banks have preferred to lend to government which is risk-free compared to small borrowers.

President Uhuru Kenyatta signs into law the Banking (Amendment) Bill, 2015 at State House, on August 24
President Uhuru Kenyatta signs into law the Banking (Amendment) Bill, 2015 at State House, on August 24
Image: PSCU

Some  MPs have vowed to block President Uhuru Kenyatta's proposal to remove interest rate caps. This misguided attitude is irrational.

Removing the interest cap will actually make loans cheaper, not more expensive. 

In theory, the cap should make loans cheaper because it says banks cannot lend at more than four percent above the Central Bank borrowing rate. But in practice since 2016, banks have cut back lending to individuals and small companies because they cannot charge higher interest rates to compensate for the perceived risk.

 

Banks have preferred to use their deposits to buy government Treasury bills which pay around three percent above CBR and are completely safe.

So the small 'risky' borrower has been forced to go to loan sharks and digital lenders that charge up to 200 percent interest. The interest rate cap has penalised the ordinary borrower by forcing him to go outside the banking system and pay more.

Banks have now jumped on the bandwagon and become digital lenders themselves to charge high effective interest rates. This needs to stop.

The MPs should be realistic. They should drop their fantasy of cheap bank loans which is just forcing the public to resort to more expensive money lenders outside the banking system.

Quote of the day: "For the nation to live, the tribe must die."

Samora Machel
South Africa assassinated the Mozambican President on October 19, 1986.