Markets & Finance

Eyes on Uhuru as MPs pass law capping cost of loans


President Uhuru Kenyatta at a past event. PHOTO | TONY OMONDI

Parliament yesterday passed a Bill capping bank interest rates at four per cent above the indicative Central Bank Rate (CBR), taking the battle to bring down the cost of loans to the doorsteps of President Uhuru Kenyatta, who must sign it before it can become law.

Mr Kenyatta, like his predecessors who have twice rejected similar Bills, presents the biggest obstacle to Parliament’s long-held ambition of putting Kenya on a controlled interest rate regime — the presidency being where the interests of the public, bankers and bank owners converge.

If Mr Kenyatta immediately signs the Bill into law, bank lending rates would be capped at 14.5 per cent based on the current CBR of 10.5 per cent.

That would be significantly different from current average lending rate of 18 per cent, as per Central Bank of Kenya (CBK) data, with some borrowers paying as high as 24 per cent for short- to medium-term loans.

The Bill, sponsored by Kiambu MP Jude Njomo, also pegs the minimum interest rate payable on deposits held in interest earning account at 70 per cent of the CBR — meaning at current rates depositors would earn an interest of 7.3 per cent on their cash.

Treasury secretary Henry Rotich and CBK governor Patrick Njoroge have already opposed the Bill, signalling it has a very slim chance of getting Mr Kenyatta’s ascent.

“Capping interest rates would lead to inefficiencies in the credit market, promote informal lending channels that undermine the effectiveness of monetary policy transmission,” Dr Njoroge said on Tuesday when he appeared before a parliamentary committee.

Dr Njoroge, however, agrees that lending rates are too high and that banks should be persuaded to lower them.

Pleading with banks to lend at lower rates in the recent past has, however, not borne fruit, leaving the lenders to charge borrowers high and arbitrary rates that have only invited legislative action from Parliament.

Mr Kenyatta had himself in 2011, while serving as Finance minister, opposed a similar Bill to regulate interest rates that was fronted by Gem MP Jakoyo Midiwo.

He failed to convince MPs to drop the Bill forcing his bosses, then President Mwai Kibaki and Prime Minister Raila Odinga, to step in to lobby the parliamentarians.

The Bill is the latest in a series of failed attempts by the legislators to provide a legal mechanism to regulate interest rates.
Mr Njomo’s amendment to the Banking Act is unique in its demand that chief executives of banks be held accountable for their institution’s failure to comply with the new law.

Using emotive Bill to squeeze handouts

“A bank or financial institution that contravenes Section 33 (b) (2) of the Banking Act commit an offence and shall be liable on conviction to a  fine not less than Sh1 million or in default, the chief executive officer will be imprisoned for a term not less than one year,” the Bill says.
Members of Parliament have been accused of using the emotive Bill to squeeze handouts from the cash-rich banking sector.

Dr Njoroge declined to disclose the current borrowing trends in the banking sector, only stating the numbers had shown a drastic slowdown that warrants interrogation.

A slowdown in borrowing is often a signal of a decline in the pace of economic activity as investors choose to put money only in sectors where returns are higher than the financing costs, and which at current rates are hard to find.

The CBK had on Monday cut the base lending rate, commonly referred to as the Kenya Banks Reference Rate (KBRR), to 8.9 per cent, signalling that interest rates should also come down, but that was read as being Dr Njoroge’s belated attempt to appease the legislators with some show of action.

READ: Rotich opposes MPs’ bid to cap bank lending rates

ALSO READ: New bid to cap bank interest rates fails in Parliament

Dr Njoroge’s return to the KBRR was particularly intriguing because of his earlier pronouncement that the rate is inefficient, a position that saw him decline to set a new one in January in line with the set principals that would have seen it rise.

A tough-talking Dr Njoroge on Tuesday gave banks 30 days to lower interest rates in line with the one percentage point cut in the KBRR or face regulatory action.

Commercial banks have had a hard time explaining to consumers why they must charge exorbitant rates for loans and their argument that the rates partly reflect the high level risk in Kenya’s lending markets has been neutralised by the super profits they announce every year regardless of the prevailing market realities.

Last year, for instance, commercial banks posted a total profit before tax of Sh145 billion, 2.8 per cent above the previous year’s, even as a record 20 listed companies issued profit warnings — meaning their profits fell by more than 25 per cent.

Most of the companies issuing profit warnings cited high financing costs as one of the factors pulling down their performance.

Non-performing loans have recently been piling up as more companies succumbed to the harsh operating environment characterised by high interest rates.

Despite the pile-up in bad loans, banks have persisted in their high pricing of loans which is characterised by wide margins commonly referred to as interest spreads.

The total bad loans book currently stands at Sh170 billion, constituting 8.4 per cent of total loans or the highest level in a decade.

Large banks have been cited as the least cooperative in the quest to reduce the cost of loans and the CBK has stated that they have room to lower lending rates given their ability to mobilise cheaper deposits compared to smaller banks.

The large banks have defied the regulator and priced their loans at par with the small lenders, allowing them to continue raking in huge profits from cheap deposits as their smaller rivals struggle under the weight of expensive deposits.

WEHLIYE: Why cost of loans won’t go down even if MPs pass Bill to cap bank lending rates

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