Kitui Central MP Makali Mulu: “Economic growth has been stifled as
borrowing is left mainly to big institutions”. PHOTO | DENNIS ONSONGO |
NMG
Workers, households and small businesses will be the biggest
gainers under new measures proposed by Members of Parliament aimed at
increasing access to credit.
The measures by the Budget
Committee aim to address a gap in the interest rate law that made loans
available but hindered lending to individuals and small businesses who
banks consider risky. This has seen banks lend more to government,
beating the intentions of the law.
Kitui Central MP
Makali Mulu, a member of the Budget Committee, said the committee would
propose removal of the minimum limit on rates paid for deposits, which
would give banks and the Monetary Policy Committee more space to direct
financial markets.
“We have locked out lending to
small borrowers. This has stifled economic growth as borrowing is left
to big institutions. Banks prefer lending to the government,” said Mr
Mulu.
Removal of the minimum interest rate for deposits means three
things. The first is that big institutional investors like pension
funds, treasuries of top-tier companies, savings and credit societies
and high-net-worth individuals will be getting less return on their
deposits.
Small savers whose accounts were converted
to transaction accounts by banks in the wake of the interest rate caps
are unlikely to be affected.
Secondly, bank margins
will increase, depending on a lender’s ability to mobilise cheap
deposits from individuals, institutions and international lines of
credit. The third is the intended end-game of the changes, increasing
access to loans by micro and small scale enterprises and households.
Asked
why MPs’ feelings on the matter have changed since the Bill’s approval
in 2016, he said: “People have seen the reality now. Feelings took over
during the debate. Banks are also feeling the effects,” he said.
The
committee’s proposal for a review falls short of the CBK and the
International Monetary Fund’s call for an outright repeal. “There has
been slow movement of credit to the private sector since the
introduction of the caps,” Nikko Hobdari, senior economist at the IMF
told MPs.
With
the interest rate caps, the average deposit rate increased from below
6.4 per cent in August 2016 to seven per cent in December last year,
while the average lending rate fell from 17.7 per cent to 13.8 per cent
over the period.
Despite this, growth in private
sector credit slowed from 4.1 per cent to 2.4 per cent as of October
last year, with agriculture, manufacturing and business services, the
main creators of jobs, the most affected.
In contrast,
lending to government rose by 31 per cent. Mr Jude Njomo, the MP who
moved the interest rate law, said it remained to be seen whether leaving
deposit rates to market forces and reduction, if any, in government
borrowing would increase access to loans.
“Reducing
domestic borrowing would be some light at the end of the tunnel. The
banks would still do all within their means to charge as high an
interest rate as they possibly could. The banks may never be trusted to
self-regulate,” he said.
Mr Njomo, however, accused
banks of playing games with access to credit. “The credit squeeze to
SMEs is a deliberate effort by commercial banks to sabotage the economy
so that the government may influence Parliament to remove the interest
rate caps,” Mr Njomo said.
The interest caps law
requires banks to pay depositors and charge borrowers interest rates
pegged on the Central Bank Rate (CBR); the rate the Central Bank charges
commercial banks that are in distress.
With CBR at 10
per cent since September 2016 when the interest rate caps came into
effect, money in deposit accounts has been receiving seven per cent in
interest per year while borrowers are charged a maximum of 14 per cent
per year.
The interest rate cap law stipulates that
banks pay depositors not less than 70 per cent of the CBR and charge not
more than four percentage points above the CBR for loans.
Treasury
last week promised the IMF that the interest rate caps would be removed
in the next budget to allow the Central Bank more flexibility in
directing the economy.
With the deposit rate floor and
lending rate ceiling, changes in the CBR were not effective as they
moved both the supply and demand side of money equally.
Treasury
had as late as last month been supportive of the caps before yielding
to pressure from the IMF, with which it is renegotiating a $1.5 billion
overdraft to cushion the country from external shocks.
Treasury
principal secretary Kamau Thugge said it was preparing a consumer
protection law to replace administrative caps on the cost of money. Such
a law — The Kenya Consumer Protection Act 2012 — already exists and may
just require a tweak to accommodate the financial sector.
The
Budget Office of Parliament, which breaks down policy matters for
legislators on critical issues like the Budget, advised last month that a
review of the interest rate regulation should ensure the controls are
completely delinked from the CBR. It said the caps had benefited the
government more than the private sector.
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