Kenyan banks react sharply to MPs bid to control price of loans

Money Markets

Kenya Bankers Association chief executive officer Habil Olaka (right) with NIC Bank CEO John Gachora at a Press briefing on the proposed regulation of interest rates at the Hilton Hotel on July 28, 2016. PHOTO | COURTESY 

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• Banks say individuals and small and medium sized enterprises, who are presumed to have a higher risk of defaulting, will be locked out of the credit market if the Bill becomes law.
• MPs passed a Bill capping bank interest rates at four per cent above the indicative Central Bank Rate (CBR), pushing the decision to President Uhuru Kenyatta who must sign it before it becomes law.

Kenyan banks Thursday reacted sharply to parliament’s Wednesday passing of a Bill to control lending rates, terming it retrogressive even as they pleaded with President Uhuru Kenyatta not to assent to it.

Individuals and small and medium sized enterprises, who are presumed to have a higher risk of defaulting, will be locked out of the credit market if the Bill becomes law, the Kenya Bankers Association (KBA) said as it painted a dark picture of the unfolding scenario.

“If the interest rate is capped then only borrowers whose risk profiles fall within the stated range will access loans,” KBA chief executive Habil Olaka said, adding that those with higher risk profiles would be pushed out to unregulated lenders such as shylocks. 

Parliament passed a Bill capping bank interest rates at four per cent above the indicative Central Bank Rate (CBR), pushing the decision to President Uhuru Kenyatta who must sign it before it becomes law.

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 the 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 bankers ruled out any chance of fighting the Bill in court if the President assents to it, saying they will abide immediately despite the dire consequences.

KBA noted the capping was against the principal of a free market, which is the guiding principle in the Kenyan market. The bankers cited failed attempts in other countries to regulate interest rates, noting that the ripple effects of the regulation overflowed to other spheres of the economy.

“Every country that has had a cap on interest rates has also had to control its currency,” said John Gachora the chief executive of NIC Bank and the vice chairman of KBA.

He cited Zambia, Nigeria and India as some of the countries that had to control their currencies due to interest rate caps.

Mr Gachora argued that most banks in such markets resorted to lending in foreign currencies whose rates were not regulated. This resulted in weakening of the local currency forcing governments that had supported capping of interest rates to also regulate currency.

Lenders are pleading with the President to listen to expert opinion on the matter and ignore the cry of millions who have borne the load of high interest rates for years.

READ: Eyes on Uhuru as MPs pass law capping cost of loans

The commercial banks, however, acknowledge that Kenya’s interest rates at current levels are high, but insisted there are better solutions than capping them through legislation.

KBA said the bankers were willing to put billions of shillings into a fund to train small businesses on how to maintain accounts and ease their access to loans.

SMEs will also receive loans at discounted rates from the fund that would be managed by the bankers at constituency level.

The banks further expressed willingness to contribute one per cent of their total loan books to the fund with each lender contributing in proportion to the size of loans issued to SMEs.

Currently, the industry loan book to the sector is worth Sh2.2 billion. Previous recommendations by bankers on how to address the issue have proven futile, making their argument weak.

Introduction of credit information sharing has largely seen banks blacklist defaulters while leaving loyal borrowers with nothing to show for.

Licensing of innovative products such as agency and mobile banking which have lowered the cost of doing business for banks, has also not produced any tangible fruits for consumers – a situation that has provided impetus for the effort to legislate the cost of money.

Three Kenyan banks, which fall among the top 1,000 banks in the world, have consistently ranked tops on returns on capital alongside lenders in volatile economies such as Egypt and Mexico.

The unwillingness by banks to heed moral persuasion on the setting of lending rates has stirred negative public anger against the lenders who continue to report super profits every year as the rest of the economy is pained by the cost of money.

A standard industry base rate, Kenya Banks’ Reference Rate (KBRR), formulated two years as a consensus between the banks and the government has flopped leaving the banks in a free rein again.