Rotich takes step to repeal capping of loan interest rates

Treasury Cabinet Secretary Henry Rotich has moved to repeal the interest rate controls effected in September 2016, meaning the cost of borrowing will go up.

Mr Rotich said the decision, which will boost banks’ profitability in the coming months, is meant to support economic growth by reviving lending to the private sector.

Banks responded to the rate caps by increasing their investment in government bonds and T-bills, resulting in a major slowdown in the growth of lending to the private sector to lows of 2.8 per cent as at February.

The lenders argued that they could not accommodate riskier borrowers within the set maximum interest rates, currently standing at 13.5 per cent.
By taking away the Central Bank of Kenya’s (CBK) powers to enforce the interest rate ceilings, Mr Rotich has effectively left banks to price their loans as they see fit.

ACCESS TO CREDIT

“In order to enhance access to credit and minimise the adverse impact of the interest rate capping on credit growth while strengthening financial access and monetary policy effectiveness, I propose to amend the Banking (Amendment) Act, 2016 by repealing section 33B of the said Act,” Mr Rotich said in his budget speech.

The section of the law targeted requires CBK to enforce lending rates by banks at a maximum of four percentage points above the base rate – officially the Central Bank Rate (CBR) — set by the regulator from time to time.

In its current form, the law also prescribes a minimum return of 70 per cent of the base rate on interest-bearing bank deposits.

The Consumer Federation of Kenya (Cofek) criticised Mr Rotich for freeing banks, adding that the minister’s promise of protecting small and medium-sized firms through a credit guarantee scheme ring hollow.

BOW TO PRESSURE

“It is wrong that Mr Rotich bowed to the International Monetary Fund (IMF) and local banks' pressure at the expense of consumers,” the advocacy group said in a statement.

“We urge MPs to veto the proposal with the contempt it deserves. The matter is actively in Court,” Cofek said, adding that the proposed credit guarantees, as well as a bill to protect consumers from predatory lenders, are a tokenisms.

The minister said the government will work with the private sector to implement the credit guarantee scheme for SMEs.

The Financial Markets Conduct Bill, 2018 is also in the works to curb predatory lending practices, including deceptive pricing of credit and abusive collection tactics.

If Rotich’s proposal goes through Parliament, banks will once again be at liberty to set interest rates according to their own risk assessments, a move that will instantly boost their earnings from re-pricing loans upwards.

Prior to the rate caps, interest rate on some bank loans stood at 18 per cent, with individuals and shaky companies taking the most expensive debt.

Among the companies whose financial costs could go up significantly in an unregulated lending market are Uchumi Supermarket, Home Afrika, ARM Cement, East African Cables and Deacons, which were borrowing at interest rates ranging be-tween 15 and 19 per cent before the rates cap.

The move is expected to boost the economy since an increase in credit encourages investment.