House demands rate cap on State SME Fund

Parliament is demanding that the Treasury puts a maximum interest rate that commercial banks can charge businesspeople borrowing from the Small and Medium Enterprise Development Fund.

But top Ministry of Finance officials on Tuesday warned that such a measure would force banks to abandon the empowerment project.

The Parliamentary Committee on Local Authorities, chaired by Sigor MP Wilson Litole asked the Treasury to rein in Co-operative Bank, Equity Bank and K-Rep.

The Treasury lent out Sh750 million in the financial year 2010/2011 at an interest rate of four per cent but the banks have loaded their mark-up on the borrowers.

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“Why didn’t you cap the interest rates, which banks could charge the final borrowers?” Mr Litole asked the Treasury mandarins summoned before the House committee over the issue.

Justus Nyamunga, economic affairs director at the Treasury, defended the ministry saying it intended to lock in gains on the leverage side, where banks had agreed to multiply the funds five times to increase the amount.

Mr Nyamunga said the Finance Ministry had expected that banks will lend out the funds at 12 per cent but the maximum interest rates charged on consumers was not fixed.

Medium enterprises

“We had understood that they will be charging 12 per cent but we will consider capping the interest rates,” said Mr Nyamunga, conceding that banks were charging more.

Each of the three banks were given Sh250 million which they multiplied by a factor of 11.5 instead of five times, raising the fund to Sh2.8 billion.

It also emerged that the Treasury did not have ways to measure the effectiveness of the funds since it was difficult to tell whether the funds were going to the right people because the said banks were already lending to small and medium enterprises (SMEs).

The CBK policy rate has increased from seven per cent in September 2011 to 18 per cent pushing commercial bank lending rates up from an average of 14 per cent to 28 per cent in same period.

The fund is estimated to have benefited 45,000 people and more than 1 million accounts have so far been opened, according to the Treasury. 

Mr George Omino assistant director, economic affairs, at the Treasury however expressed concern that banks may opt out of the programme since they have access to other funds to lend to SMEs.