New law to cap high interest rates in the offing

By JAMES ANYANZWA

NAIROBI, KENYA: The government is to introduce a new law to cap high interest rates charged by commercial banks, President Uhuru Kenyatta has said. Uhuru said high rates have increased the cost of doing business and rendered the country uncompetitive.

Accompanied by his Deputy, William Ruto, Uhuru raised concerns over the ballooning interest rate spreads. He noted that the country could lose out on key development agenda due to the high cost of financing by commercial banks.

Ruto noted that the difference between lending and deposit rates, which currently stands at 10.57 per cent, is among the highest on the continent.

Affordable credit

He said the development is a disincentive to savers and borrowers. “These kind of spreads tells you there is something wrong which needs to be fixed. Central Bank must help us to deal with this puzzle so that we can make credit affordable,” he said.

Data from Central Bank shows that the lenders realised a total of Sh31 billion in profit before tax for the three months to September 30, 2013.

But players in the banking industry, however, cite high cost of collateral, poor infrastructure, a complicated land tenure system and a slow judicial process as some of the reasons for high priced loan products.

Uhuru said Central Bank of Kenya (CBK) and other public institutions would be required to lead in ensuring there is conducive business environment, including a low and stable price regime.

He said the proposed CBK law, currently in draft format, would strengthen the institutional framework of the regulator to deliver better on price and financial stability. Uhuru said affordable bank credit is a prerequisite for sustainable economic growth and development.

“This law is expected to be in place by early 2014,” he said. Uhuru was speaking during the official launch of the Kenya @ 50 commemorative Gold Coin in Nairobi yesterday. The Coin has been developed by the CBK is landmark marking Kenya’s 50 years of independence.

 The proposed law seeks to give CBK more powers to monitor how commercial banks calculate the interest charged on loans.

This follows concerns the lenders are not ‘honest’ on how they compute their lending rates, including lack of openness in the hidden costs of procuring credit. “This law will make CBK to be effective in providing oversight when it comes to calculation of interest rates by commercial banks,” said Treasury Cabinet Secretary Henry Rotich. “With this law, banks can be more transparent when calculating their rates. We need more transparency to ensure that the banking market is functional.”

Last year, plans by MPs to cap bank interest rates through amendments to the Finance Bill 2011 failed after some of the legislators of the 10th Parliament were hosted to a luncheon at a Nairobi hotel by the then Finance Minister Njeru Githae.

MPs verdict

The amendments proposed by Gem MP Jakoyo Midiwo sought to cap the maximum interest rate that a bank charges for a loan at not more than four per cent of the Central Bank Rate. MPs had also sought to have the minimum interest banks applied on consumers’ deposits set to at least 70 per cent of the base rate set by CBK.

  But that did not happen. In 2001, former Gem MP Joe Donde’s attempt to move the very amendments, also suffered a similar fate. High interest rate regime is partly blamed for increased default rates in the sector, including the low up take of mortgages, currently estimated at 19,000.