Parliament has for the second time rejected the National Treasury’s bid to scrap the ceiling on interest rates, ensuring the continued flow of cheap loans to Kenyans.
The Lawmakers, through the Departmental Committee on Finance and National Planning, amended the Finance Bill, 2019 by re-introducing the provision on capping interest on loans which suspended Treasury Cabinet Secretary (CS) Henry Rotich had removed. As it stands, if the bill passes as it is, then it means that loans will still be priced at four percentage points above the Central Bank’s Rate (CBR).
The CBR is currently at nine percent.
“The committee rejected the proposed amendment in the Bill and observed that the banking industry continued to be profitable,” said the committee led by Kipkelion East MP Joseph Limo.
The bill whose architect is Kiambu Central Member of National Assembly Jude Njomo introduced cheap loan rates to Kenya. After the bill was signed into law in 2016, banks reduced lending to the mass market and Small and Medium Enterprises (SMEs).
On this; reduced credit to small enterprises, the legislators blamed it on increased borrowing by Government, which was crowding out private sector borrowers.
Henry Rotich, then had sought to repeal section 33B of the Banking (Amendment) Act, 2016 so as to enhance the flow of credit, strengthen financial access and monetary policy effectiveness. However, despite Treasury’s assurance that they had put in place some reforms to “optimise lending to the private sector,” lawmakers were unconvinced that banks have learnt their lesson.
The banking lobby group, Kenya Bankers Association (KBA), told the committee that the industry would be accountable to the public and Central Bank of Kenya on the commitments they made prior to the enactment of the interest capping law.
“They stated that they were committed to maintaining the current performing customers’ loan contracts within the existing contractual framework and it was only new loan contracts that will be risk-priced (after) the repeal of interest rate capping law,” the committee said of KBA’s proposal.
However, through a small interview with clients in the mass market, banks have always not adhered to the above rule. Loans are usually appraised according to the performance of the economy; most often interest rates have been raised on existing loans.Kenyan Business Feed asks, will this change?
Furthermore, according to MPs, there is no assurance that banks will re-open the credit taps for small businesses.
Slow credit growth
There was a 5.2 percent credit growth to the private sector as on June 2019. Credit to the private sector- households and businesses- grew at a slower pace since the rate cap came into effect on September 2016.
But analysts have however argued that the slowdown in credit growth had already started even before the rate cap. They say the slowdown has not been unique to Kenya. Private sector credit growth has been sluggish in Uganda and Tanzania as well.
However, it is important to note that credit growth stood at 24 per cent as of October 2014.
A report by the International Monetary Fund, however, noted that the slowdown in private sector credit quickened after the interest rate cap, with the agricultural and trade sectors hit the hardest.
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