New Bill seeking to fix borrowing rates in Kenya misguided

It is foolish to legislate prices. Full stop. Yet that is what Members of Parliament are trying to do with the recently passed Bill that puts a cap on interest rates at no more than four percent above the indicative Central Bank rate. The ill-advised Bill also sets the minimum interest earned by deposits at 70 per cent of the Central Bank rate. In brief, this is a populist Bill that will serve no more than create more problems for Kenyan borrowers.

By passing the Bill, MPs betrayed a singular lack of understanding of how interest rates work. Several factors contribute to the observed market lending rates. These include the latent risk faced by banks – Will borrowers pay on schedule? What is the nature of the collateral that debtors borrow against, and how are they reliable? How efficient is the legal system in dealing with defaulting debtors? How reliable is the data on borrowers’ credit history? On top of these factors, there is also the question of structural variables like projected economic performance, the extent of government borrowing, and alternative investments from which banks could be making more money.