Treasury Cabinet Secretary Henry Rotich has moved to repeal the
interest rate controls effected in September 2016, meaning the cost of
borrowing will go up.
Mr Rotich said the decision,
which will boost banks’ profitability in the coming months, is meant to
support economic growth by reviving lending to the private sector.
Banks
responded to the rate caps by increasing their investment in government
bonds and T-bills, resulting in a major slowdown in the growth of
lending to the private sector to lows of 2.8 per cent as at February.
The
lenders argued that they could not accommodate riskier borrowers within
the set maximum interest rates, currently standing at 13.5 per cent.
By taking away the Central Bank of Kenya’s (CBK) powers to enforce the interest rate ceilings, Mr Rotich has effectively left banks to price their loans as they see fit.
By taking away the Central Bank of Kenya’s (CBK) powers to enforce the interest rate ceilings, Mr Rotich has effectively left banks to price their loans as they see fit.
ACCESS TO CREDIT
“In
order to enhance access to credit and minimise the adverse impact of
the interest rate capping on credit growth while strengthening financial
access and monetary policy effectiveness, I propose to amend the
Banking (Amendment) Act, 2016 by repealing section 33B of the said Act,”
Mr Rotich said in his budget speech.
The section of
the law targeted requires CBK to enforce lending rates by banks at a
maximum of four percentage points above the base rate – officially the
Central Bank Rate (CBR) — set by the regulator from time to time.
In its current form, the law also prescribes a minimum return of 70 per cent of the base rate on interest-bearing bank deposits.
The
Consumer Federation of Kenya (Cofek) criticised Mr Rotich for freeing
banks, adding that the minister’s promise of protecting small and
medium-sized firms through a credit guarantee scheme ring hollow.
BOW TO PRESSURE
“It
is wrong that Mr Rotich bowed to the International Monetary Fund (IMF)
and local banks' pressure at the expense of consumers,” the advocacy
group said in a statement.
“We urge MPs to veto the
proposal with the contempt it deserves. The matter is actively in
Court,” Cofek said, adding that the proposed credit guarantees, as well
as a bill to protect consumers from predatory lenders, are a tokenisms.
The minister said the government will work with the private sector to implement the credit guarantee scheme for SMEs.
The
Financial Markets Conduct Bill, 2018 is also in the works to curb
predatory lending practices, including deceptive pricing of credit and
abusive collection tactics.
If Rotich’s proposal goes
through Parliament, banks will once again be at liberty to set interest
rates according to their own risk assessments, a move that will
instantly boost their earnings from re-pricing loans upwards.
Prior
to the rate caps, interest rate on some bank loans stood at 18 per
cent, with individuals and shaky companies taking the most expensive
debt.
Among the companies whose financial costs could
go up significantly in an unregulated lending market are Uchumi
Supermarket, Home Afrika, ARM Cement, East African Cables and Deacons,
which were borrowing at interest rates ranging be-tween 15 and 19 per
cent before the rates cap.
The move is expected to boost the economy since an increase in credit encourages investment.
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