National Treasury of Kenya. Banks shun lending to individuals and SMEs as they are considered risky. PHOTO FILE | NATION
Kenya’s National Treasury is working on a proposal that will
regulate all lenders, including banks, in a bid to make credit more
accessible and affordable.
The EastAfrican has
learnt that the proposal is part of a response to the interest rates
capping passed by parliament in 2016 that has been broadly seen as not
achieving the objective of allowing access to credit at affordable rates
to borrowers.
The proposal, which will involve looking
at borrowers with different risk profiles to ensure lending rates are
based on them, is among suggestions contained in the Financial Markets
Conduct Bill 2018.
“For a long time, market conduct of
lenders has not ben given sufficient attention. This Bill is addressing
this as part of efforts to make credit affordable to all borrowers,
based on their profiles. For example, salaried employees should be
considered less risky than others who do not have a predictable income
on a monthly basis,” Dr Geoffrey Mwau, a director-general at the Budget,
Fiscal and Economic Affairs Department in Kenya’s National Treasury
told The EastAfrican.
He added: “We are
looking at differentiated rates for different people depending with
their risk profiles to ensure that people are not overcharged. The
proposal is still under discussion.”
Fixed rate
Currently, most lenders charge borrowers a fixed rate regardless
of their risk profiles, a situation that has encouraged banks to shun
lending to individuals and SMEs, which they consider high risk, and
direct their lending to large corporate borrowers and government.
To
address this, the National Treasury is also implementing a credit
guarantee scheme, by developing the law and institutional framework that
will ensure SMEs and more risky borrowers access credit at affordable
rates.
This will involve the government working with other stakeholders.
“Over
time, through this scheme, banks and other lenders will know who is
risky and who’s not. The government will also work with credit reference
bureaus to ensure information about borrowers is standardised and
reported appropriately,” Mr Mwau added.
The National
Treasury is consulting and seeking the input of banks, Members of
Parliament and other stakeholders with a view to coming up with a “more
realistic” solution to access to credit at an affordable rate.
This,
according to Dr Mwau, will involve amendment to different laws to avoid
any inconsistencies in the laws governing the lending sector.
Kenya
has fixed the lending rates for banks at four percentage points above
the prevailing Central Bank Rate (CBR) following the enforcement of the
Banking Amendment Act 2016 in September 14, 2016.
However,
this Act does not regulate non-deposit taking lenders and mobile money
lenders, many of whom have taken advantage of the situation to charge
exorbitant rates.
The Banking Act also requires banks
and financial institutions to disclose all charges and terms relating to
a loan before granting it to a borrower and caps minimum interest rates
on deposits at 70 per cent of the existing CBR.
Benchmark lending rate
Last
week Central Bank’s Monetary Policy Committee (MPC) retained the
benchmark lending rate at 9.5 per cent setting lending rates at 13.5 per
cent.
The Bill for the control of interest rates was
introduced in parliament as private members Bill by the Kiambu township
legislator Jude Njomo after commercial banks refused to heed to the
government call to lower their lending rates which had skyrocketed to as
high as 30 per cent in 1994 and over 25 per cent in 2011.
Being
a private members Bill former Attorney General Prof Githu Muigai said
it would only take the intervention of parliament to review or abolish
the rate cap law.
However last week Mr Njomo told The EastAfrican
that parliament would not allow any Bill that seeks to review the
interest rate caps and that the action by banks to freeze credit to the
private sector is a well calculated move for this law to be
reconsidered.
“I don’t think anybody is ready to review
the caps apart from the banks. I have talked to my colleagues in the
house and I don’t think anyone of them is willing to review.
Whoever
was drafting the Finance Bill 2018 read the mood of the country and
knew that if he/she included the provisions to review the rate caps, the
whole Bill would collapse on the floor of the house,” said Mr Njomo.
The
IMF and the World Bank have instructed Kenya to review the rate caps
arguing the legislation has stifled credit to the private sector while
the Central Bank argues that the law has reduced the effectiveness of
its monetary policy instruments of controlling money supply in the
economy.
Kenya committed itself to review the rate caps
during its discussion with the IMF in March this year that led to the
extension of its $1.5 billion precautionary facility whose review was
postponed last year.
Although the facility was approved
the IMF would be completing its outstanding programme reviews of
Kenya’s economy by September this year.
In April this
year the parliamentary Finance Committee rejected CBK Governor Patrick
Njoroge’s request to remove controls on interest rates arguing move was
meant to please the Bretton Woods institutions at the expense of
borrowers.
While the current lending rate in Kenya is
capped at 13.5 per cent interest rate on Treasury bills has averaged
13.95 per cent from 1991 until 2018, reaching an all-time high of 84.67
per cent in July of 1993 and a record low of 0.83 per cent in September
of 2003. This sounds appetising for banks to lend to the government.
Additional reporting by Victor Kiprop.
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