Fasten your belt, cheaper loans will come at high cost

Before President Uhuru Kenyatta took his chair at State House Nairobi to sign the controversial Bill capping interest rates on Wednesday, he took time to explain to the public why he had taken the unorthodox step of taking Kenya’s financial services sector back to a price controls regime.

Commercial banks had only waged propaganda war against the people of Kenya whenever the issue of high interest rates was raised with little gains accruing to ordinary borrowers, the president said in a statement sent from his office.

Mr Kenyatta further argued that the banks had in the past reneged on pledges to lower rates and continued to inflict immense economic pain on productive sectors of the economy.

But some observers have pointed to the fact that the president’s action was mainly driven by politics – this being an election period during which he will have to account for the promises he made to the voters in 2013.

Low cost of credit was one of the key promises made to the voters four years ago and it was going to be difficult to approach the same electorate with different promises relating to their finances having failed to deliver on this.

“There was no political mileage to be gained from rejecting the Bill on interest rate caps and so the president chose to do what was politically popular,” argued Jaindi Kisero, a veteran journalist and public policy analyst.

That argument is supported by the fact that Mr Kenyatta signed the Bill despite the fact that his government – through its profligate spending that is mainly supported by heavy domestic borrowing – is the biggest contributor to the high interest rates regime in Kenya.

As one observer starkly put it to Mr Kenyatta on Wednesday evening, “your government not only capped interest rates but also borrowed Sh18.3 billion by selling a 10-year bond at an average yield of 15 per cent on the same day.”

This, he went on, literally amounts to setting the 10-year risk free rate at more than 15 per cent and expecting banks to lend to risky businesses and individuals at 14.5 per cent – a mind boggling expectation.

READ: Uhuru signs Bill capping interest rates: full statement

Parliament, which passed changes to the banking law to cap commercial interest rates at 400 basis points above the central bank’s policy rate, now 10.5 percent, has not fared any better.

This is because Kenya’s 2010 Constitution gives parliamentarians immense powers over the management of public finances, including limiting how much the government can borrow, at what price and for what purpose.

This argument points to the fact that were MPs bent on finding solid and lasting solutions to the high cost of credit, they would have targeted rampant government borrowing from the domestic market – which at the current average lending rate of 18 per cent accounts for more than half (10.5 per cent) the overall pricing of credit. 

Instead, the legislators chose the populist path of framing the banks as villains who are not ashamed of raking in abnormal profits at the expense of poor and struggling Kenyans.

Mr Kenyatta, whose family owns one of Kenya’s top tier banks, made a similar argument in his statement pointing to the fact that the lenders continue to report some of the highest returns-on-equity in Africa, in spite of Kenya having one of the most efficient and effective financial markets on the continent.

“Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers,” said Mr Kenyatta.

Kenyan businesses have in recent years complained that high commercial lending rates, which average 18 per cent or more, hobble corporate investment. Individuals say the high rates put borrowing out of reach of many.

Mr Kenyatta sought to re-assure investors that the government was not going back on its economic policies.

“We also reiterate our commitment to free market policies in driving sustainable economic growth, to which we owe much of our success,” the president said in the statement.

The Treasury and the central bank had opposed caps, promising to use other measures and to work closely with banks to lower rates, adding they feared placing a ceiling on commercial rates could cause banks to restrict lending.

The government would monitor the impact of the new law on access to credit and the potential emergence of unregulated, exploitative lenders, as it implements the law, Mr Kenyatta said.

The central bank said it would not comment on the signing of the amendment Act, while the bank industry body said it would comply and kept its criticism of the cap.
“There is little evidence from other countries that such interventions have helped the majority of citizens,” the Kenya Bankers Association said.

Chief executives of commercial banks who fail to comply would face a fine of Sh1 million ($10,000), a year in jail, or both.

The amended law, which becomes effective immediately, also sets a minimum interest rate for bank deposits of 70 per cent of the central bank’s benchmark rate.

Mr Kenyatta noted it was the third time Parliament had tried to reduce interest rates and that banks had twice promised to lower rates, before reneging.

Bank stocks Thursday plummeted at the Nairobi Securities Exchange (NSE) as investors factored in the impact of interest rates cap on future profitability of commercial banks and the shilling showed signs of suffering similar pressures in the near and medium term.