Banks dangle Sh30bn SME loans to avert interest rates cap

Besieged bank executives yesterday reacted to the new Bill capping interest rates with a raft of measures aimed at easing public pressure on President Uhuru Kenyatta to sign it into law.

Top on the list of proposed measures is the creation of a Sh30 billion pool of funds for lending to small and medium-sized enterprises at friendly interest rates.

In a memorandum signed by chief executives of all commercial banks and presented to the Central Bank of Kenya governor, Patrick Njoroge, the lenders pledged to contribute to the fund based on their current lending to small businesses.

The decision follows three weeks of intense lobbying by the commercial banks against a new Bill that seeks to cap lending rates and set a floor for interest payable on savings.

The bankers are worried that parliamentarians may quash Mr Kenyatta’s veto by marshalling the two-thirds majority required to force through a Bill the President has rejected.

Funds from the Sh30 billion pool will be lent to small and medium-sized enterprises at below 14.5 per cent – the legal maximum under the proposed legislation capping lending rates.

Women and youth will be allocated Sh10 billion out of the Sh30 billion.

“The banks will also set aside Sh100 million to offer technical assistance to micro, small and medium-sized business to enable them secure financing,” said Habil Olaka, the chief executive of the Kenya Bankers Association (KBA).

The banks also pledged to immediately cut interest rates by at least one percentage point as part of the effort to pass on the benefits of a recent cut in the base lending rate commonly known as the Kenya Banks’ Reference Rate (KBRR).

Only three banks have so far lowered their lending rates since the CBK cut the base rate last month, entrenching the impression that the lenders are quick to increase interest rates but slow to bring them down with the change in the base rate.

READ: Accountants endorse Bill controlling interest rates

Yesterday, the bank executives also announced that they had eliminated bank account closure charges — dubbed a nuisance fee — in an effort to ease movement of customers across lenders.

The cancellation is, however, inconsequential to the interest rates debate as the cost of migrating a loan to another lender remains high, hampering movement to banks with cheaper lending rates.

KBA blamed the government for the high cost of transferring a debt, noting that the Treasury pockets most of the revenue accruing from the process as stamp duty.

Dr Njoroge and the bank executives, however, steered clear of the government’s role in racking up interest rates through rampant and often unplanned borrowing from the domestic market using short-term instruments such as the Treasury Bills.

The Treasury’s dominance in the domestic debt market means banks will continue lending to the private sector at high interest rates in the comfort that an attractive and risk-free alternative exists in lending to the government at the rate of more than 10 per cent.

Lenders have to factor the opportunity lost to give money to the government, which is considered a risk-free borrower, in their pricing of a loan to an individual or corporate entity with high risk of default.

Parliament, in passing the interest rate capping Bill, also ignored the Treasury’s role in the high interest rate regime.

The Bill caps bank interest rates at four per cent above the indicative Central Bank Rate (CBR), and sets the floor for deposit rates at 70 per cent of CBR.

If Mr Kenyatta signs the Bill into law in the current environment, bank lending rates would be capped at 14.5 per cent based on the current CBR of 10.5 per cent.

That would be significantly different from the prevailing average lending rate of 18 per cent, as per CBK data.
Some borrowers have, however, been servicing loans at rates of 24 per cent.

The Institute of Certified Public Accountants of Kenya (ICPAK) yesterday endorsed the Bill, saying it would save borrowers from a sector that has operated “an oligopolistic market mode where credit pricing is not reflective of market fundamentals.”

“Argentina, France, Zambia, Canada, Germany and a host of countries within the European Union have successfully resorted to such measures in order to protect their citizenry from exploitation. Contrary to the sentiments expressed against this policy reform, the banking sectors in majority of these countries are considerably more vibrant and efficient,” ICPAK said.

Bankers have on the other hand pointed to jurisdictions such as Nigeria where the introduction of interest rate caps resulted in serious economic turmoil to support their opposition to the Bill.

The lenders also argue that interest rate capping will lock out small businesses and individuals, whose risk premium is considered high, from accessing loans in the formal market, pushing them to informal lenders such as shylocks.