Rotich says plan for rate cap law repeal in Budget

Treasury secretary Henry Rotich. FILE PHOTO | NMG 

In Summary

• CS says legal amendment will be introduced in Parliament in June to address issue
• He says State is developing a legal framework that will address the whole management of credit in the economy.
• The CS acknowledges the law may have had some impact on the performance of credit to private sector but said this was not the only factor at play.

By JAMES NGUNJIRI
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The Treasury has confirmed it will introduce legal amendments to the law capping interest rate despite recent opposition by MPs, saying the review will provide consumer safeguards.

Treasury Cabinet Secretary Henry Rotich Wednesday said State is developing a legal framework that will address the whole management of credit in the economy.

“It is not only the issue of cost of credit but issues of consumer protection. We are going to put forward a package of reforms which should address the real cause of high credit cost in Kenya and lead to the elimination of law capping interest rates,” said Mr Rotich during the launch of 2018 Economic Survey Report in Nairobi.

“That process is ongoing and we’ll be submitting a legislation in Parliament in June to address the issue when presenting the Finance Bill,” said Mr Rotich.

READ: LETTERS: Interest rate caps popular, but it’s a blunt policy tool

Private sector

The CS acknowledges the law may have had some impact on the performance of credit to private sector but said this was not the only factor at play.

Kenya National Bureau of Statistics (KNBS) data shows that in one year to December 2017, credit to the private sector only grew by 1.6 per cent, much slower than the previous year.

Central Bank of Kenya (CBK) data shows that in the 12-months to March 2017, credit to the private sector grew by 3.3 per cent, far below the preferred 12 to 15 per cent considered optimum to fuel economic growth.

“There was a slowdown in credit to private sector, and this was mainly attributed to reduced credit demand due to weak performance in some sectors of the economy, tightening of banking sector credit standards following the introduction of capping law, and increased usage of alternative sources of funding,” said Zachary Mwangi, director-general, KNBS.

READ: Uhuru backs bid to scrap interest rate cap law

ALSO READ: Size of loans up but small firms ejected from lending market

Hurt consumers

Consumer Federation of Kenya (Cofek) and the Institute of Certified Public Accountants of Kenya (ICPAK) have warned that the removal of legal limits on borrowing will hurt consumers by returning the financial sector to the era of high credit charges.

But the International Monetary Fund (IMF) and the CBK are pushing for the review saying the capping is choking borrowing especially to the private sector.

Last week in London, President Uhuru Kenyatta backed the review saying the policy has failed to increase credit to traders.

The Banking (Amendment) Act, 2016, came into force in September 2016 and caps loan charges at four percentage points above CBK’s (CBR), now standing at 9.5 per cent.