Expensive loans loom as MPs ready to end interest rate cap

Friday, October 18th, 2019 08:00 | By
Parliament in session. Photo/PD/SAMUEL KARIUKI

By Anthony Mwangi  and Rawlings Otini

Kenyans should brace for higher interest rates on loans after Members of Parliament said they will not oppose a presidential memorandum on the Finance Bill seeking to scrap lending caps.

In 2016, the government imposed the legal caps on lending rates at four percentage points above the Central Bank of Kenya’s benchmark, currently nine per cent — and put the maximum borrowing rate at 13 per cent. Banks will have the leeway to value loans based on their risk valuation.

President Uhuru Kenyatta declined to approve the Finance Bill, 2019 and asked MPs to scrap commercial lending rate caps.  Yesterday, parliamentary leadership said MPs would pass the memorandum as presented by the President.

“We are going to approve the presidential reservations as they are in the memorandum. We are scraping lending caps,” said Leader of Majority Aden Duale.

Majority Whip Benjamin Washiali said he would rally members to support the president’s proposal.“We cannot oppose the President. We will remove the lending caps as it is good for the economy. We have had issues with the high rates of interest charged by banks but with the current state of the economy we need to remove the caps,” he told People Daily.

Proposed amendment

Washiali said Parliament in its own wisdom, resolved to increase the debt ceiling to Sh9 trillion so as to give the government leeway to seek cheaper loans.

The Mumias East MP said following the increase of the debt ceiling, the government will now go for loans from the World Bank, whose interest stands at an interest of as low as one per cent.

Banks have argued that the cap has slowed down their profitability and multinational agencies such as the International Monetary Fund (IMF) have been calling for scrapping or modification of the interest restriction law.

In his Memorandum, Uhuru highlights several factors that necessitated the proposed amendment to Clause 45 of the Bill, which seeks to amend the Banking Act (Cap.488) by repealing section 33B so as to remove capping of interest rates chargeable on loans.

They include the reduction of credit to the private sector, particularly Micro, Small and Medium Enterprises (MSMEs), the decline in economic growth, the weakening of the effectiveness of Monetary Policy, the reduction of loan advances by banks and the mushrooming of shylocks and other unregulated lenders in the financial sector. 

Other factors are the withdrawal of banks’ lending to specific segments of the market, the increase in average loan size, reflecting lower access by small borrowers and larger loans to more established firms and finally the decreased diversity of loan products.

The decision by the President has also aligned the Act with a High Court ruling which directed in March last year that the section of the law capping rates was unconstitutional. Kiambu Town MP Jude Njomo, the man behind the rate capping law, had drafted a Bill seeking to amend the Banking Act, 2016 to align the law with  a ruling of the High Court. 

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