Kenyan President Uhuru Kenyatta has come to the defense of local banks and summarily asked lawmakers to read from the same script.
President Kenyatta has declined to approve the Finance Bill and has instead asked Members of Parliaments to scrap commercial lending rate caps before he can sign the bill.
By declining to assent to the bill, Mr Kenyatta is in agreement with the Treasury and the Central Bank of Kenya that argue the interest rate cap is hurting the economy.
“The President has not assented to the Bill and has returned it to Parliament for review. The issue is the repeal of interest capping law,” Aden Duale, the Leader of Majority in the National Assembly, told the Business Daily on Wednesday.
“The memorandum will be communicated to the House on Thursday afternoon by the Speaker,”
Win for banks
Uhuru’s stand is a win for banks who have argued since the capping of interest rates came into law in 2016 that the cap has slowed down their profitability.
Multinational agencies like the International Monetary Fund (IMF), have also called for scrapping or modification of the interest restriction law.
Their argument is that the cap has cut private-sector loan growth because banks have avoided lending to customers deemed as risky, including small and medium-sized businesses as well as individuals who borrow for consumption therefore stunting the economy.
How Capping of interest rates came to be
In September 2016, the government imposed the legal caps on lending rates at 4% points above the Central Bank’s benchmark — currently at 9% — effectively limiting local banks borrowing rate at a maximum of 13%.
A year later, the Central Bank of Kenya Governor Dr. Patrick Njoroge joined calls for scrapping of the capping law.
“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.
Scrapping the capping law easier said than done
The Institute of Public Accounts of Kenya, Kenya Private Sector Alliance and the Law Society of Kenya among others are opposed to the removal of caps even as the Kenya Bankers Association try to push for its removal.
Critics, argue that removing the capping rate will expose borrowers to high lending rates, which had touched a high of 25% before the introduction of the ceiling.
Similarly, some argue that some countries such as South Africa have capping laws and it hasn’t done much harm.
Should MPs now agree with him and remove the cap, borrowers will be left at the mercy of banks on the one hand.
It remains to be seen how MPs will react to the President’s recommendations to repeal the cap, given that they have twice rejected attempts by the Treasury to push for a repeal of the law that ushered in the caps.
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