State faces hard task to scrap interest rate cap law

Treasury’s bid to do away with the law controlling interest rates faces a major hurdle, with some MPs saying they will not pass the proposal.

This came even as Treasury said it has aggressively been lobbying legislators to accept the repeal of Section 33B of the Banking (Amendment) Act, 2016, which places a ceiling on the rate of interest lenders can charge on a loan.

The law stipulates that commercial banks can only lend at four percentage points above the Central Bank Rate (CBR), which currently stands at 9.5 per cent.

This means that all loans being offered by commercial banks and other financial institutions regulated by Central Bank of Kenya have a maximum interest rate of 13.5 per cent.  

In the Budget Statement last Thursday, Cabinet Secretary Henry Rotich proposed repealing of the section that introduced capping of interest rates.

However, a section of MPs has already started forming a brick wall, promising to shoot down the proposal in what they say is their duty to act in the interest of common folk.

“I’m pretty sure this (the amendment) is something that is not going to sail through,” said Jude Njomo as quoted in a report by Reuters.

Mr Njomo, the Kiambu Town MP, sponsored the Banking (Amendment) Bill in 2016. It passed through Parliament and was signed into law by the President in September 2016.

“The Executive has brought the proposal. But we also have a responsibility, like people’s watchmen, like people’s representatives to speak on behalf of the people... our people would not like the interest rate cap to be removed,” added Njomo.

National Assembly Leader of Majority Aden Duale in April said he would oppose any move to do away with the rate cap, noting that Parliament had passed the law for the good of Kenyans.

However, Treasury is also said to be spending sleepless nights lobbying MPs to amend the law, citing the decline of credit to the private sector. Mr Rotich is said to have met legislators, including Njomo.

The CS said returning to the earlier regime where banks had a free hand to determine lending rates would result to increasing credit access to local firms, which have been starved of loans as banks opt to lend to Government through Treasury Bonds.

Provide credit

Banks have refused to lend to individuals and households at lower rates, saying the risk does not match the returns.

“This is to enable banks and other lenders to provide more credit especially to borrowers they consider riskier,” said Rotich on Thursday.

He reiterated his stand yesterday, where he said the rate caps were a hurdle for economic growth and that the country should either get rid of the capping regime or forget about growth, including the Big Four agenda.

He added that Kenyans should look for other options to bringing down the cost of credit.

“The economic agenda that is before us requires that we have a private sector that is active and an economy that is able to lend because we are going to rely on the private sector to fund the Big Four agenda,” said the CS at a forum on interest rate cap at Strathmore University.

“If we are actually going to talk of Big Four and we have the interest rates cap, I think we should better just forget about it. It is not going to happen with this type of lending regime that we have,” said Rotich.

“I agree that credit is expensive but we need to lower it through other means, that is why we are trying to find other sources of cheap funds.”

Treasury Principal Secretary Kamau Thugge said they are constantly engaging with MPs to reach an agreement.

“We are telling them credit to SMEs is drying up. For them (small enterprises), getting it at a high rate is better than a cheaper rate that they cannot get,” he said, adding that the banking sector might also have to cede some ground to win over the stubborn legislators.

Treasury has drafted a bill that will curb predatory lending to individuals and small enterprises, and also plans to establish Biashara Fund to give cheap loans to SMEs, youths and persons with disabilities.

This, Treasury believes, will make legislators drop their hard stance as it solves the problem of exorbitant interest rate that led to the capping of the interest rates.

Analysts do not see the politicians letting up in the battle with Treasury, with the rate cap being one of the few major wins MPs have got for Kenyans in the recent past.

“This is a proposal that the MPs may not take lightly. That is their project and they have owned it. He (Rotich) is effectively proposing to scrap it,” said Anthony Muthusi, partner at business advisory firm Ernst & Young.