Central Bank of Kenya ill-placed to tame rogue banks – expert
An order by President Uhuru Kenyatta that Central Bank uses all the instruments at its disposal to ensure banks offer affordable loans in an unregulated environment could run into headwinds.
Upon the repeal of interest rates, there was widespread fear commercial banks would revert to charging exorbitant interests on loans as was the case before 2016 (when rate cap was introduced) since without such law it is expected the law of demand and supply will come into play.
“I urge the Central Bank to use the full range of instruments of regulation and policy at its disposal to prevent predatory lending and ensure that banks can offer loans at affordable interest rates,” Uhuru said.
“The law was introduced following a public outcry against the high cost of credit.
The implementation of the law was expected to lower the cost of credit and also increase access to credit. Unfortunately, the law has had an adverse effect on the economy and reduced the amount of available credit,” he added.
Cautionary measures
However, Edward Kusewa, an Economics lecturer at St Paul’s University, says there are not many tools CBK can use to ensure low interest rates, save for cautionary measures such as promoting transparency and adherence to banking ethics.
“There isn’t much the CBK can do now that we are in a liberal market. It is now up to the market forces of demand and supply to determine the rate.
If CBK finds that a bank is overcharging way above the rest, it could withdraw its operating licence. By overcharging you lose customers as a bank,” said Kusewa.
He said other instruments, such as quantitative easing and balance sheet reduction commonly used in the developed world could not be applied in Kenya as the country has a huge debt deficit.
The use of CBK lending rate in determining that of commercial banks made it difficult for the banking regulator to use the tool in altering the economy’s liquidity, taming inflation, strengthening the exchange rate, hence, affecting CBK’s ability to steer the economy.
In February, CBK issued commercial banks with the Kenya Banking Sector Charter, a document that seeks to entrench ethical banking responsive to customer needs.
The charter, signed by all banks, requires banks to adopt responsible pricing, full disclosure of charges and fees, customer centricity, and ethical culture.
Existing loans
In its submission to Parliament just before the 2019 Finance Bill was passed into law, Kenya Bankers Association, on behalf of commercial banks, promised not to increase interest rates on existing loans, as had been the practice in the previous years.
The bankers’ lobby said only new borrowers would pay new rates depending on each individual’s risk profile.
“Banks are committed to maintaining the current customers’ loan contracts within the existing contractual framework.
It is only new loan contracts that will be risk-prized post the repeal of the interest rate capping law,” the memorandum signed by KBA chief executive Habil Olaka said.
