Eyes on Uhuru as MPs pass law capping cost of loans

Money Markets

President Uhuru Kenyatta at a past event. PHOTO | TONY OMONDI 

By EDWIN MUTAI, emutai@ke.nationmedia.com AND GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• Chief executives of commercial banks and other lending institutions will face a Sh1 million fine or imprisonment for a term of not less than one year or both if convicted of flouting the law.
• Mr Kenyatta had himself in 2011, while serving as Finance minister, opposed a similar Bill to regulate interest rates that was fronted by Gem MP Jakoyo Midiwo.
• Members of Parliament have been accused of using the emotive Bill to squeeze handouts from the cash-rich banking sector.

Parliament yesterday passed a Bill capping bank interest rates at four per cent above the indicative Central Bank Rate (CBR), taking the battle to bring down the cost of loans to the doorsteps of President Uhuru Kenyatta, who must sign it before it can become law.

Mr Kenyatta, like his predecessors who have twice rejected similar Bills, presents the biggest obstacle to Parliament’s long-held ambition of putting Kenya on a controlled interest rate regime — the presidency being where the interests of the public, bankers and bank owners converge.

If Mr Kenyatta immediately signs the Bill into law, bank lending rates would be capped at 14.5 per cent based on the current CBR of 10.5 per cent.

That would be significantly different from current average lending rate of 18 per cent, as per Central Bank of Kenya (CBK) data, with some borrowers paying as high as 24 per cent for short- to medium-term loans.

The Bill, sponsored by Kiambu MP Jude Njomo, also pegs the minimum interest rate payable on deposits held in interest earning account at 70 per cent of the CBR — meaning at current rates depositors would earn an interest of 7.3 per cent on their cash.

Treasury secretary Henry Rotich and CBK governor Patrick Njoroge have already opposed the Bill, signalling it has a very slim chance of getting Mr Kenyatta’s ascent.

“Capping interest rates would lead to inefficiencies in the credit market, promote informal lending channels that undermine the effectiveness of monetary policy transmission,” Dr Njoroge said on Tuesday when he appeared before a parliamentary committee.

Dr Njoroge, however, agrees that lending rates are too high and that banks should be persuaded to lower them.

Pleading with banks to lend at lower rates in the recent past has, however, not borne fruit, leaving the lenders to charge borrowers high and arbitrary rates that have only invited legislative action from Parliament.

Mr Kenyatta had himself in 2011, while serving as Finance minister, opposed a similar Bill to regulate interest rates that was fronted by Gem MP Jakoyo Midiwo.

He failed to convince MPs to drop the Bill forcing his bosses, then President Mwai Kibaki and Prime Minister Raila Odinga, to step in to lobby the parliamentarians.

The Bill is the latest in a series of failed attempts by the legislators to provide a legal mechanism to regulate interest rates.
Mr Njomo’s amendment to the Banking Act is unique in its demand that chief executives of banks be held accountable for their institution’s failure to comply with the new law.

Using emotive Bill to squeeze handouts

“A bank or financial institution that contravenes Section 33 (b) (2) of the Banking Act commit an offence and shall be liable on conviction to a  fine not less than Sh1 million or in default, the chief executive officer will be imprisoned for a term not less than one year,” the Bill says.
Members of Parliament have been accused of using the emotive Bill to squeeze handouts from the cash-rich banking sector.

Dr Njoroge declined to disclose the current borrowing trends in the banking sector, only stating the numbers had shown a drastic slowdown that warrants interrogation.