Opinion and Analysis
MPs must get realistic in quest to cap cost of loans
Posted Thursday, August 2 2012 at 20:40
For the second time in as many years, Kenyan parliamentarians have launched an attempt to enact legislation that will curb the freedom that banks have to charge interest on loans.
Perhaps it is important to state from the onset that the driving force behind this seemingly undying campaign is the high cost of living that has persisted in the national economy -- at least till mid this year.
The combination of high inflation pressure and a weakening of the Kenyan currency against major world currencies has left interest rates at exceptionally high levels -- above 24 per cent.
The banks have, however, not done themselves any good by refusing to remove the veil over the pricing of loans -- even as they continue to announce billions of shillings in profits every year.
Parliament’s response to these challenges has not been impressive either. It has been at best populist and at worst an exhibition of gross lack of understanding of how the financial system works.
Take Gem MP Jakoyo Midiwo’s latest attempt to legislate on interest rates, for instance.
Having failed to pass a law fixing the rates within defined upper and lower limits, he has now come with a proposal that seeks to impose such caps on what in his view are state-owned banks - KCB, National Bank and Consolidated Bank.
Anybody with even the slightest knowledge of Kenya’s banking industry knows that at this point in time, none of the financial institutions can be said to be state-owned.
The government does not have majority shareholding in these banks to warrant their designation as government-owned banks.
In KCB, for instance, the government after years of privatisation has less than 25 per cent of the shares.
Since these banks together account for only a small fraction of the lending market, putting them in a controlled interest rates regime while leaving their rivals to charge market rates would definitely be putting them on the road to stagnation and even collapse.
It would also amount to punishing ordinary citizens who have chosen to invest in the banks -- a right that is granted and protected in the Constitution.
Making loans affordable to the Kenyan public is a noble objective, but it can only be achieved through use of public policy to deal with issues such as inflation and exchange rate swings that affect interest rates.
That is where Mr Midiwo and his colleagues need to direct their energy.