Controlling banks’ interest rates will stop exploitation of Kenyans

National Treasury Cabinet Secretary Henry Rotich reading the 2015/2016 Budget in the National Assembly on June 11, 2015. The failure of the Central Bank and the Treasury to cushion Kenyans from economic oppression by banks informs the need for a legislative recourse. PHOTO | BILLY MUTAI | NATION MEDIA GROUP 

In Summary

• My proposed law to regulate interest rates speaks to the general welfare of the citizenry. It intends to provide a mechanism for regulation of banks and financial institutions’ interest rates through the introduction of ceilings.
• The Banking (Amendment) Bill proposes to put a cap on the rate of interest charged on loans and to fix the minimum rate of interest that these institutions must pay on the deposits they receive from their customers.
• To this end, the Bill seeks to introduce a new section that requires banks or financial institutions to disclose all charges and terms relating to a loan to a borrower.
• The proposal further seeks to set the maximum interest rate chargeable by a credit facility at below 4 per cent of the base rate set by the Central Bank of Kenya and guarantee a minimum interest rate of at least 70 per cent of the base rate.

My proposed law to regulate interest rates speaks to the general welfare of the citizenry. It intends to provide a mechanism for regulation of banks and financial institutions’ interest rates through the introduction of ceilings.

The Banking (Amendment) Bill proposes to put a cap on the rate of interest charged on loans and to fix the minimum rate of interest that these institutions must pay on the deposits they receive from their customers.

To this end, the Bill seeks to introduce a new section that requires banks or financial institutions to disclose all charges and terms relating to a loan to a borrower.

For far too long, many bank customers have been confronted by obnoxious charges that they were initially not aware of, resulting in their inability to service their loans, hence the high percentage of non-performing loans - they were worth Sh107.1 billion in 2014.

The proposal further seeks to set the maximum interest rate chargeable by a credit facility at below 4 per cent of the base rate set by the Central Bank of Kenya and guarantee a minimum interest rate of at least 70 per cent of the base rate.

These proposed provisions, if passed by Parliament, shall go a long way in safeguarding the interest rate charged on loans while protecting clients’ deposits.

BANKING INDUSTRY

Kenya risks never attaining its Vision 2030 goal because of a banking regime that promotes super profits for the banking industry and modest profits or even losses for entrepreneurs.

It is instructive that in the past few years, seven out of the 10 highest earning companies in Kenya are banks.

The argument that regulating interest rates will kill small-scale entrepreneurs holds no water.

In fact, this cadre of businessmen has for long resorted to other sources of credit such as chama due to banks’ high interest rates.

The failure of the Central Bank and the Treasury to cushion Kenyans from economic oppression by banks informs the need for a legislative recourse.

In 2000, the then Gem MP, Mr Joe Donde, introduced the Central Bank of Kenya (Amendment) Bill 2000.

Although the Bill was passed and assented to by the president after amendments, it could not be enforced due to a technical oversight and resultant litigation.

In 2012, another Gem MP, Mr Jakoyo Midiwo, proposed a similar Bill, but the Treasury convinced legislators that it would go against the concept of a free market and regional financial integration.

Treasury indicated that the high interest rates would be addressed by a proposed law to overhaul governance at the CBK.

The proposed Central Bank of Kenya Bill was set to be tabled in Parliament in February 2014 to synchronise the banking regulatory regime with international standards. It never saw the light of day.

KENYA BANKER'S ASSOCIATION

The establishment of the Kenya Bankers’ Reference Rate (KBRR), on which banks would price their loans, was one of the recommendations of a committee formed by Treasury Cabinet Secretary Henry Rotich in January 2014 to cut interest rates.

However, banks have continued to charge double the KBRR recommended rates.

The Kenya Bankers’ Association (KBA) has neither the statutory nor institutional authority and ability to effectively control member banks and therefore cannot suddenly assume the role of a monetary regulatory authority. 

Indeed, KBA has been in favour of freely fixed interest rates rather than a public monetary policy.

Before the capping of oil prices was introduced, our local pump price did not have any relationship with the international barrel prices.

The oil companies, like the KBA, put up a spirited fight. They claimed that regulating the oil pump price would spell doom for the companies. The prices are regulated and the companies are still making profit.

Many countries regulate interest rates. Argentina, Zambia, Canada, Germany, and a host of countries in the European Union have instituted measures to protect their citizenry from exploitation.

I see no reason why Kenya should not go this route.

Mr Njomo is the MP for Kiambu constituency.