More than 40 per cent of new borrowers will be locked out from accessing credit if the proposed law capping interest rates is signed, commercial banks have said, even as the Treasury secretary says the lenders have room to cut prices of loans.
The banks estimate that borrowers of loans worth Sh18 billion will be pushed out from the banking system to microfinance institutions and informal lenders such as shylocks, which are even more expensive.
“If the Bill moves forward as proposed...the immediate impact is more than Sh18 billion worth of personal loan applications of values of Sh200,000 and below.
“This Bill will, therefore, transfer such lending from banks to micro finance institutions, informal lenders and shylocks which charge substantially higher and unregulated interest,” said Kenya Bankers Association in a statement.
The lenders are opposed to a Bill that Parliament recently passed proposing to cap lending rates at four per cent above the indicative Central Bank Rate (CBR) and a floor for rewarding savers of 70 per cent of the CBR. The CBR is reviewed every two months or once a month when there is turbulence in the foreign exchange market.
The Bill was presented to the President Uhuru Kenyatta on Monday. He has two weeks to either sign the Bill or reject it. The President has the option of listening to economic experts including his Treasury secretary and Central Bank of Kenya governor and reject the Bill or heed to public outcry on the high cost of credit and assent it to law.
Room to slash their interest rate
Treasury secretary Henry Rotich and CBK governor Patrick Njoroge have, however, noted banks have room to slash their interest rates without being forced to do so through legal framework.
“The question is why extract too much [from customers] yet you can still live with less profits and lower lending rates. We will look at all the arguments, including whether banks are doing enough and the mechanisms we need to put in place to ensure that,” said Mr Rotich yesterday.
Experts warn capping will force banks to avoid giving loans to perceived risky borrowers who are mainly individuals and small and medium-sized businesses.
Fitch Ratings agency has, however, pointed out that a drop in interest rates will fan public appetite for borrowing allowing banks, especially large lenders, to push more loans and cover for any profit squeeze.
Banks, microfinance banks and licensed saccos lend to 42.3 per cent of Kenyan borrowers as per survey by not-for-profit institution Financial Sector Deepening Kenya released earlier this year.
The informal market — which includes credit from suppliers, chamas, shylocks and employers — serve 7.2 per cent of borrowers while unlicensed saccos, micro-lenders and mobile financial services lend to 32.6 per cent of Kenyans.
Most Kenyans rely on personal savings and saccos to build or buy houses thereby avoiding mortgages due to high interest rates banks charge.
There are currently 24,458 mortgage accounts in the country which has been a source of concern given home ownership is a key goal for most Kenyans.
The majority of the mortgages belong to bank staff who are offered favourable interest rates, as low as six per cent while the public is charged up to 23 per cent.