Banks win big as interest rates cap dropped

Tuesday, November 5th, 2019 20:44 | By
Bank customers queue for services. Borrowers will suffer the most after MPs handed commercial banks free hand in determining the rates. PHOTO: COURTESY

Commercial banks can now vary interest rates charged on loans after Parliament failed to overturn a memorandum by President Uhuru Kenyatta seeking to scrap capping of lending rates.

Their action means Kenyans should brace for a return of the old regime when banks charged punitive interest rates of up to 25 per cent.

The interest rate cap was signed into law in September 2016, restricting commercial banks to lend at rates not more than four percentage points above the Central Bank’s benchmark rate. The current recommended rate for commercial banks is 13 per cent.

Since the capping law was enacted, most banks have not been lending to Small and Medium Enterprises, hence affecting their growth. Most banks opted to invest in government securities, saying SMEs and individuals had become riskier to lend to.

Today’s attempts by MPs to stop debate on the motion were defeated after the Leader of Majority Aden Duale defied boos and heckles from protesting colleagues to push through the motion.

The opposing team fell short of the requisite two-thirds majority (233), only managing 161 members, to overturn the presidential memo.

Led by Tom Kajwang’ (Ruaraka), Sylvanus Osoro (South Mugirango) and Omboko Milemba (Emuhaya), the MPs tried to stop Duale and Finance committee chair Benjamin Limo from presenting the committee’s report in vain.

Temporary Speaker Patrick Mariru had a hard time urging the heckling members to order. He, however, managed to continue with the session amid boos with Duale putting spirited solo pressure to have the presidential memo passed.

When Speaker Justin Muturi moved in to proceed with business, he called the mover to respond amid protests from the opposing members. 

The Constitution stipulates that if the President refuses to assent to a bill, he must within 14 days submit it to the Speaker of the National Assembly, a memorandum indicating the specific provisions of the bill, which, in his opinion, should be amended.

The MPs also had an option of approving the bill in its original form, supported by 233 members.

Moving the motion yesterday, Duale said he was optimistic the removal of the cap would go a long way in increasing access to credit and allow expansion of the economy and creation of employment which will in turn raise additional revenue for the government via increased productivity.

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

Defending the removal of interest caps, Duale said financial activities which is one of the sources of economic growth has recorded decline since the introduction of the caps, from 6.5 to 4.6 per cent in 2018.

However, in the new law, existing borrowers will not be affected in any changes the banks make after an amendment by the Finance committee seeking to spare old loans holders from new rates.

“The committee settled for the second option where they agreed to adopt the President’s reservations to Clause 45 and made a further amendment to save the rights of existing borrowers,” Limo said.

Limo said the committee chose the route it took over amending the bill as proposed by the President because the latter would have an effect on interest rate and the market for loanable funds.

“The committee is of the opinion that by rejecting the president’s reservation would be tough as the threshold for voting of such an amendment requires two-thirds support,” he said.

Muturi had asked the committee to give the House guidance on the commencement date of the provision and the effect of the amendments with regard to existing loan contracts between lenders, banks, other financial institutions and borrowers.

President Uhuru declined to approve the Finance Bill, 2019, and asked MPs to scrap commercial lending rate caps, which have hugely reduced credit access.

In his Memorandum, Uhuru highlighted several factors that have necessitated the proposed amendment. 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. 

More on News