Speaking in Parliament, KBA’s Chief Executive Officer (CEO) Habil Olaka sais that this has been the practice in the past and instead, only new borrowers will pay the new rates in line with their risk profile.
“Banks are committed to maintaining the current customers’ loan contracts within the existing contractual framework,” the memorandum signed by Habil Olaka said.
The memorandum has been sent to Parliament as part of the submissions for the finance bill, through which the National Treasury seeks to do away with the interest rate capping law.
“It is only new loan contracts that will be risk-prized post the repeal of the interest rate capping law,” Mr Olaka added.
In the past two years, commercial banks have put up a spirited fight to reverse the interest rate capping law sponsored by Kiambu MP Jude Njomo and supported by Consumers Federation of Kenya (COFEK).
The law, which came as a relief to many bank customers, ended the era of expensive loans, which had seen commercial banks make billions of shillings through charging high interest rates.
Some banks were charging as high as 34 per cent for non-secured loans, but paying peanuts for deposits; the law introduced in September 2016 brought these to an end by capping lending rates to four percentage points above the Central Bank Rate (CBR).
The CBR has remained at nine per cent for most of this year, forcing banks to only lend at a maximum of 13 per cent. However, experts have argued that the law has not achieved its intended purpose since it ended up denying small businesses access to credit. KBA also shares the same opinion.
“The law was intended to spur credit growth in the market especially to unsecured individuals, micro, small and medium enterprises. However, this objective has not been realised,” KBA says.
Banks claim that the capping of interest rates has also affected the conduct of monetary policy and overall economic performance at the household, enterprise and macro levels.
“The proposed repeal will address the challenge of many individuals accessing high cost of credit from nonbank lenders after being pushed out of the banking system by the law,” KBA adds.
After failing to scrap the law through parliament using the finance bill failed twice last year, lenders had the support of the Central Bank of Kenya (CBK) and the Treasury in pushing for the repealing of the law.
Another pressure comes from the International Monetary Fund (IMF) which has been pushing CBK and the National Treasury to have the law repealed.
Removing the caps on interest rates is one of the promises Kenya made to the IMF as it negotiated the renewal of the Kshs. 150 billion standby credit facility when it expired last year.
Currently, the High Court had given Parliament until March next year to re-examine the law, on the grounds that it was unconstitutional.
However, that is not without a fight as Mr Njomo has moved to fix the loophole by introducing a fresh bill in line with the court’s directive.
Failure to amend the ambiguous section of the act meant going back to a free-floating interest rates regime, where commercial banks set the cost of loans.
Kenyan Business Feed is the top Kenyan Business Blog. We share news from Kenya and across the region. To contact us with any alert, please email us to e[email protected]