Editorials

CBK’s relook at interest rate capping law timely

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Central Bank of Kenya governor Patrick Njoroge. FILE PHOTO | NMG

It is now six months since the law capping interest rates came into force. And from what banks and the Central Bank of Kenya (CBK) are saying, the law has not had the impact it was intended for – making credit affordable for the majority of Kenyans.

The exact nature of the impact this law has had on the financial markets remains to be measured and analysed.

That is why the CBK’s decision to study the impact of this law is spot on. There are, however, a few home truths that the banks and even the CBK cannot run away from.

First, is that the decline in credit growth to the private sector and households started long before this law even passed through Parliament.

It was lowest at around four per cent in September when the said law came into force and has since marginally risen to 4.4 per cent.

So any solution to the lending market challenges must not be narrowed to repealing the law but to the bigger picture and be holistic.

When the banks talk about the impact of this law in the financial markets and the economy, the focus is singularly on that number 4.4 per cent — somehow justifying their prediction that the flat rates would lead to less loans and advances.

Their position is anchored on the claim that the flat rate does not facilitate the charging of a risk premium associated with individuals and other risks. But the counter argument is that this talk of risk pricing is emerging only now because the shoe is on the other foot.

It is also true that in the free market regime that preceded the rate caps, the banks charged every borrower the high interest rates across the board while making bad use of the available risk assessment tools such as the credit reference bureaus to blacklist and deny some borrowers credit – a position the courts and the CBK have declared illegal.

Second and perhaps most important is that in the meantime, commercial banks have taken to throwing cash at the Treasury, a lazy but prudent option that has definitely left little cash for lending to the private sector.

The CBK is right to conduct a study of the interest rates capping law on the economy at this point in time, especially given rising concerns over the slow growth of credit to the key manufacturing, trade, real estate and households sectors that ordinarily take 60 per cent of total loans in the economy.

In our considered view, the National Assembly’s attempt at controlling a single factor in the in financial markets while leaving everything else free was dumb economics that only politicians can get away with. The hard truth about all this, however, is that the Treasury and the CBK by extension remain a big part of the credit pricing problem besetting our economy.

This is because the CBK, working as an agent of the Treasury would be insane to expect that the private sector and individuals will access credit at any affordable rates while it continues to take cash on behalf of the Treasury at highly elevated rates.

Besides CBK action, a decidedly ill-advised part of the rate capping is the minimum deposit rate that has surely put smaller banks on the road to oblivion and made the large banks ‘‘too big to fail’’.

Like banks, who are investing in ‘risk-free’ treasuries, a rational person will take his cash to a strong better capitalised bank, making it impossible for smaller players to mobilise deposits.

Add M-Akiba, the mobile-based government bonds buying platform that is availbale to ordinary citizens at 10 per cent, and retaining customers begins to look difficult even for large banks.

READ: Relief for borrowers as central bank holds rate at 10 per cent

ALSO READ: CBK acts on credit squeeze after rate cap introduction - VIDEO
Politically, no one expects a reversal of the rate capping law in an election year – a reality that gives the CBK additional time to study the market.

It must, however, be clear to all parties in this matter that any effort to correct the existing anomalies in the financial markets recognises the fact that Kenyans have no appetite for a mere return of the astronomically high interest rates regime.

And if banks are sabotaging the economy, the CBK should move in and punish them severely as per its mandate.