Uhuru second President after Moi to ink rate cap law

Uhuru Kenyatta has become the second president to approve interest rate caps after former Gem MP Joe Donde presented a similar proposal in 2000 that was signed into law by former President Daniel arap Moi but scuttled by the system.

Well before Mr Donde made the attempt there had been controls in interest rates until July 1991, which were fully removed and each individual bank allowed to charge what it wished.

The change was part of the reforms carried out in the economy geared toward letting market forces work instead of maintaining controls. The controlled regime — including for exchange rates — had been in place for decades and was now being subjected to rapid changes.

Following the repeal of the law there was a sharp increase in interest rates. The rates could now move up and down though mostly tended to move up.

The problem is that the change in interest rates regime also came at a time liberalisation was taking place across various sectors of the economy as well as in politics. Donors were giving Kenya a wide berth because its leadership was seen as reluctant to reform.

The economy, therefore, was suffering with frequent shortages of foreign exchange since money from donors did not come through. Domestic borrowing increased leading to high interest rates that have largely persisted to date.

The high price of money has been a concern especially because the spread between lending and deposit rates has remained relatively high compared to that in other countries of similar development and which are not at war.

The spread has been at more than 10 per cent most of the time, with the current level being 11 per cent, with the average lending rate at slightly above 18 per cent while the mean fixed-deposit price is at about seven per cent.

Even Central Bank of Kenya (CBK) governor Patrick Njoroge is on record lamenting about the spread saying that they are the highest outside conflict-ridden countries.

“The interest rate spreads need to narrow down. They are in the order of 9.7 per cent, which relative to peers is humongous,” Dr Njoroge said in January.

Mr Donde — who is now a member of the Public Service Board in Siaya County government — proposed to reduce this spread by having three percentage points above the benchmark rate and have depositors paid at least 70 per cent of the same rate.

That would leave the spread at six per cent, which Mr Donde felt would fully compensate the banks for their work. In the latest law, the spread is put at seven per cent, so it is slightly better than that in the Donde Act.

“At the time that controls used to be there, people would borrow and buy houses in Nairobi. My father bought a house in Buru Buru in those days of controls. Banks were still making a profit,” said Mr Donde on the phone.

The former lawmaker’s Bill had proposed to introduce not only an interest rates cap and floor, but also the in duplum rule and also the setting up of a monetary policy advisory committee. Both of the latter proposals were eventually adopted.

The Monetary Policy Committee was supposed to set up the base rate upon which the floor and the ceiling of deposit and lending rates respectively would be set. The in-duplum rule says a nonperforming loan cannot be overloaded with charges and interest once it has doubled the principal.

During former President Mwai Kibaki’s reign another attempt to control interest rates failed. At one point MPs were even accused of being paid Sh50,000 each to scuttle the bill.

“David Mwiraria and Amos Kimunya [ministers during the Kibaki regime] introduced the in-duplum and the Monetary Policy Committee that I had earlier proposed,” said Mr Donde.