CBK now wants to scrap capping of interest rates after year of slow economic growth

The Central Bank of Kenya (CBK) this week gave the strongest signal that it intends to push for scrapping of the year-old law capping interest rates due to its negative effect on the economy.

CBK governor Patrick Njoroge, said preliminary findings of a joint study with the Treasury on the impact of the rates capping on growth of credit had confirmed a negative impact.

“I think it is clear to us that this (rate cap) has been problematic in many ways. What I cannot tell you is the path going forward (and) how this will happen,” Dr. Njoroge said.

He was however quick to warn commercial banks that they will have to be more disciplined in the pricing of loans so as not to overcharge borrowers.

“What needs to change is the discipline among lending institutions. They cannot go ahead setting interest rates the way they were doing before. And it is our job to deal with them in the context of that market discipline,” he said.

The Banking (Amendment) Act, 2016 was passed by Parliament late last year meaning it can only be repealed by the same institution.

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The law sought to protect ordinary Kenyans from being overcharged by commercial banks which used to charge interests rates as high as 20% by putting a caps loan charge at four percentage points above the Central Bank Rate (CBR), presently standing at 10 per cent.

“All I can tell you is that it is in our interest as a country. It is in our interest as a central bank to work to reverse these measures and go back to a regime where interest rates are freely determined, but in a disciplined environment,." Dr. Njoroge added.

Economists and financial experts, however, warned that the law would in fact have a negative effect on the same ordinary Kenyans it sought to assist access affordable financial assistance.

And true to their prediction banks shunned high-risk clients who majority happened to be poor Kenyans from their financial services for fear of defaulting leaving some at the mercy of Shylock's who exploited them even more.

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Within months of the law coming into effect, several banks registered billions of losses which led them to trim their operations in order to stay afloat and as a result let go hundreds of their staff.

Several banks also embraced online banking as a survival strategy.

The government had on March 15 directed the CBK and the Treasury to study the impact the rate cap has had on access to affordable credit by small and medium-sized enterprises.

“That (study) has progressed and we have some preliminary data, which we may share next week. I am not sure they will be ready to be kicked around by yourselves (journalists), but I think we are getting there. Again, if we miss it by a day (or) a month, I hope we can understand each other,” Dr. Njoroge said.

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If agreed the review of the rate cap can start being operational next year.

The prolonged electioneering period after the Supreme Court nullified President Uhuru Kenyatta's win and called for fresh elections has further slowed down the economy further denting hopes for banks to recover before the end of the year.