Think carefully before scrapping interest cap

Recently, President Uhuru Kenyatta sent a Memo to Parliament detailing why the interest capping law should be repealed. He rejected the Finance Bill and called for repeal of section 33b of the Banking Act.

Sadly, information available indicates that National Assembly’s Finance and National Planning Committee has agreed with the Presidents’ arguments and only proposed that the status quo remain on existing loans in terms of interest rate and duration agreed.

In early 2016, MPs passed the law imposing a cap on commercial lending rates at four per cent points above the Central Bank benchmark to cushion Kenyans against prohibitive cost of loans. Commercial banks have been pushing to have the law repealed. Accordingly, Uhuru agrees with the National Treasury and the Central Bank of Kenya (CBK) that the interest rate cap is affecting the economy.

Although Uhuru’s arguments that the law chokes growth of small and medium enterprises (SMEs) is compelling, it will be hard to guarantee that banks will be rational in determining the lending rate unless some form of regulation is put in place.

This means borrowers will be at the mercy of banks which will have the liberty to price their loans depending on their risk assessment. This is likely to negate all the gains made since the introduction of the law.

Further, the President noted the interest cap had led to the weakening and effectiveness of the country’s fiscal policy. Consequently, in his opinion, this has made CBK less effective in handling economic shockwaves and in delivering on its core mandates of fiscal management. The law, he added, had led to bourgeoning of shylocks and other unregulated moneylenders.

However, Kenyans' biggest fear is the possibility of commercial banks taking us where we were before the law was enacted. During that period, banks increased their base lending rates to punitive levels in the range of 24-30 per cent.

Repealing this law therefore may have enormous impact on businesses. The increased interest rates will eat into these businesses’ revenues and thus affect their short-term and long-term development goals. Such a scenario would be so serious that some businesses may have to implement some cost-cutting measures such as laying-off staff to be able to service loans.

This will have an overall multiplier effect on the economy and will definitely slow down its performance. Loss of jobs and decline in economic growth will lead to untold suffering for Wanjiku. Certainly, this could not have come at a worse time when businesses are laying off staff due to the hard economic times.

On their part, commercial banks have been arguing that repealing the law would allow them to start lending to small businesses. Currently, the banks are barely lending to private sector, claiming the risk of lending at a rate determined by the law is too high.

CBK has argued that the current situation has seen a major slowdown in the productive sectors of the economy and many startup businesses have either scaled down operations or shut down.

The bankers have also argued that the law discourages them from lending to clients with significant risk of defaulting. However, these arguments do not exhaustively address the need to repeal the law since today we have Credit Reference Bureau that assists banks to determine a borrower’s creditworthiness. Further, the argument by the banks is debatable as they continue to make huge profits even while operating under the rate regulation regime.

Indeed, the low-interest rates lead to many things that significantly impact positively on the business community and the lifestyle of every Kenyan. This should be maintained if we are to experience better economic growth. When loans become cheap and readily available, many ordinary businesspeople are able to get the much-needed finance to boost their businesses with or without the traditional collateral. This will lead to rapid economic growth and high liquidity in the market.

Finally, even though the President has the interest of the country at heart going by his arguments, it is important that the process of repealing this law be considered prudently so as to avoid a situation where the economy is exposed too much. This is because it is Wanjiku who suffers most when the economy is hurting. CBK must tell Kenyans how it intends to cushion them from prohibitive loans.

Mr Kimani is a communication specialist and a certified public relations analyst.