President Uhuru signs Bill capping bank interest rates

President Uhuru Kenyatta signs the interest rate Bill at State House in Nairobi on August 24, 2016. FILE PHOTO | PSCU 

By JAMES ANYANZWA

In Summary

• “We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms,” he added.

Kenya’s President Uhuru Kenyatta has signed into law a bill seeking to control interest rates by capping lending rates at four percentage points above the Central Bank rate (CBR) currently set at 10.5 per cent.

This means commercial banks will not be allowed to lend at rates above 14.5 per cent.

In a statement Wednesday President Kenyatta said Kenyans are disappointed and frustrated by the bank’s insensitivity to lowering the cost of credit and paying good returns on deposits.

“I share these concerns. Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers, said Kenyatta

The new law caps the minimum deposit rates that banks give customers to 70 per cent of the CBR—Central Bank’s benchmark lending rate to commercial banks.

On July 28, 2016, the National Assembly passed the Banking (Amendment) Bill, 2015.

The Bill intends to regulate interest rates that are applicable to banks’ loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits.

Credit becoming unavailable

“Upon weighing carefully all these considerations, on balance, I have assented to the Bill as presented to me,” said Kenyatta.

“We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms,” he added.

In a statement, the  Kenya Bankers Association (KBA) welcomed President Uhuru Kenyatta decision to sign the interest rate cap bill into law, saying that they were still committed to bringing down loan interest rates, promoting a savings culture and enhancing consumer protection.

"We however do not feel that an arbitrary rate cap is in the best interests of the majority of people and businesses that this law seeks to support. 

The reality is that there is little evidence from other countries that such interventions have helped the majority of citizens, and in a number of countries such laws have been reversed to promote financial inclusion," KBA said.Kenya becomes the first country in the region to cap its interest rates.

A fortnight ago, panicked bankers reacted to the proposed capping of interest rates by pooling $300 million to lend to small and medium sized enterprises at friendly interest rates in hopes of abating public wrath, but seemed to be contradicting their proposal to the President Uhuru Kenyatta of a similar facility worth $20 billion.

Legislators had threatened to veto his decision and marshal two-thirds support for a popular amendment, a political hot potato in an election year.