MP behind interest cap law says banks overreacting

The current credit squeeze by banks in reaction to the interest rate capping legislation is only temporary and will soon ease out, the parliamentarian behind the law has said.

Kiambu Member of Parliament Jude Njomo, who tabled the Bill that was passed into law last year, reckons the ongoing sackings of bank staff and credit freeze by local lenders was “a scheme” to prove that the new regulation is not working.

The MP has said the banks will be forced to soon resume lending when they see their profits shrinking.

“This is merely a knee-jerk reaction by banks to prove that the law was not going to translate to cheaper loans. They have deliberately stopped lending but it will not be sustainable in the long run because they need to make income and their key business is lending,” said Mr Njomo on Tuesday.

"I think a repeat of what happened when banks chased away those with low deposits about a decade ago and the emergence of mass market lenders to serve the informal sector borrowers will happen as well," he added.

He was speaking after a debate forum organised by the Catholic University of Eastern Africa to discuss the effects of the Banking (Amendments) Act 2016 on the industry.

Central Bank of Kenya (CBK) Governor Patrick Njoroge was also lined up to speak at the event but he did not attend.

HIGH RISK CUSTOMERS

The Kenya Bankers Association (KBA) chief executive Habil Olaka said the new law has stood between banks and credit flow to unsecured borrowers since the lenders now see them as high risk customers.

He also denied that the credit freeze was deliberate, saying the new law will have to be repealed to allow banks to lend more and at rates that can cover their risks.

“We are in the business of lending so there is no way we can hold credit deliberately. What this law has done is to make it riskier to carry out unsecured lending and that is why you hear people complaining there is difficulty in accessing credit. This has a direct effect to the growth of the economy and even the International Monetary Fund has advised for its repeal,” Mr Olaka said, adding that there are other ways to ensure that banks do not exploit borrowers with high interest rates.

According to the KBA boss, the only winners in the new regime are the shylocks who still charge exorbitant rates.

President Uhuru Kenyatta signed into law a Bill capping bank interest rates at a maximum of four percentage points above the Central Bank Rate effective September 2016.

The law regulates the cost of bank loans and returns payable on savings.

Kenyan banks’ fourth quarter 2016 and first quarter 2017 results will be key pointers to the effects the new law has had on lenders.

A number of firms have cut staff by the thousands and consolidated branches in a move largely attributed to digitization of banking processes and reduced earnings after the new law came into force.