A law capping interest rates in Kenya has stoked fears of copycat
legislation in East Africa and a reversal of common integration policies
ahead of the launch of a regional monetary union. TEA GRAPHIC | FILE
By Allan Olingo and Bernard Busuulwa
In Summary
- A law capping interest rates in Kenya has stoked fears of copycat legislation in East Africa and a reversal of common integration policies ahead of the launch of a regional monetary union.
- Under the East African Community Monetary Union Protocol, the member states committed themselves to pursue a free market economy with a floating exchange rate.
- Experts believe the law will block credit from reaching higher risk borrowers and could force banks into mergers, replacement of staff with technology and to establish subsidiaries in regional markets where interest rates are not capped.
A law capping interest rates in Kenya has stoked fears of
copycat legislation in East Africa and a reversal of common integration
policies ahead of the launch of a regional monetary union.
By virtue of Kenya being the most developed economy in the East
Africa Community, its apparent abandonment of the free market ideals at
the heart of the monetary union convergence criteria has left regulators
and investors uncertain of the direction of the protocol.
National Bank of Rwanda Governor John Rwangombwa said money
managers across the region were waiting to see the impact the caps would
have on access to credit but maintained that controls were not always
good in managing financial issues.
“National laws are supposed to address national issues. Kenya’s
financial sector is the most developed in the region and second to South
Africa on the continent. It is a good testing field,” said Mr
Rwangombwa.
Under the East African Community Monetary Union Protocol, the
member states committed themselves to pursue a free market economy with a
floating exchange rate.
“The policy decision could create some disharmony or friction
within the region’s banking sector and eventually affect the monetary
union integration process,” said Charles Katongole, senior executive at
Standard Chartered Bank Uganda.
Joram Ongura, an equities trader at SBG Securities Uganda, said
monetary union policy targets could now come under review because they
were originally anchored in market determined fundamentals.
The immediate impact in Kenya of President Uhuru Kenyatta
signing the Central Bank (Amendment) Bill 2015 into law on Wednesday was
a rout on banking stocks listed on the Nairobi Securities Exchange,
which shed $840 million in market value by Thursday.
Banking stocks at the Dar es Salaam Stock Exchange, Uganda
Securities Exchange and Rwanda Stock Exchange were stable. Even Kenyan
bank counters cross-listed in the three bourses were unmoved because
they rarely trade.
In Kenya, some banks halted the issuance of new personal
unsecured loans, motor loans and emergency cash loans, citing the
uncertainty around the implementation of the new law. Co-op Bank bucked
the trend, saying it would be lending at the new rates immediately.
“We advise that pending receipt of full guidelines from the
Central Bank of Kenya, particularly on the applicable base rate, all new
credit facilities shall be at a rate not exceeding 14.5 per cent. Do
refresh the relevant facility offer letters in liaison with our credit
management division,” Co-op Bank chief executive officer Gideon Muriuki
instructed branch managers in a circular Friday.
The law pegs interest rate margins to a base rate commonly
understood to be the Central Bank Rate, which is currently at 10.5 per
cent (there are contentions it could be the KBRR, which is reviewed
every six months) but is revised bimonthly.
It requires lending rates not to exceed four percentage points
above the base rate, meaning the maximum interest rate a borrower should
pay for a loan is 14.5 per cent.
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