Until recently, the impression was that we were headed for a return to a free lending rates control regime. This, especially after a High Court ruling in March declared the rate–capping law unconstitutional.
It looked like that judgment had sparked off a new sense of urgency of finding a consensus around the dismantling of the controls was beginning to emerge.
Suspended Finance minister Henry Rotich captured the mood of the moment by serving notice that he would be introducing repeal amendments.
Among others, key voices that joined the fray were the governor of the Central Bank of Kenya, Patrick Njoroge, the Kenya Bankers Association, the IMF and the World Bank.
It seems the tide is quietly changing direction and that chances of a return to a free lending rate regime are beginning to look slimmer.
First, the political environment has changed following the change of guard at the National Treasury and the abrupt exit of both the Finance minister, Mr Rotich, and principal secretary, Dr Kamau Thugge, who had emerged as strong supporters of a return to a deregulated lending rates regime.
Secondly, the instability and fissures within the Jubilee administration has created more diffusion. The policy influencers are not likely to be willing to stick their necks out to implement politically unpopular reforms.
Thirdly, influential committees of Parliament, including the architect of the original rate capping law, the MP for Kikuyu, Jude Njomo, have also served notice that they will oppose any attempts to remove the caps.
In the coming months, I see the Kenya Bankers Association being forced to change tactics.
As long as this debate continues to be framed as if all that is at stake is greed by bankers on the one hand and on the other MPs standing for the rights of consumers, a consensus on the broader policy questions will be difficult to reach.
I have suggestions for MPs.
If they indeed want to bring lending rates down in a sustainable way, they must attack the root cause of the problem, namely, government borrowing.
The rate cap law is a blunt object that does not go to the root of the problem.
Parliament has the powers to force the Treasury to bring down government borrowing to sustainable levels.
As long as interest on government securities, which is the risk free rate, remains high, it follows that consumers will be charged high lending rates whether you a caps law or not.
Secondly, Parliament should consider passing a financial services consumer protection law.
In South Africa, small borrowers are protected by interest rate caps regulated by a consumer protection body — the National Credit Agency.
Four years since the rate caps law was born, it is clear that it has not protected the ordinary borrower from loan sharks.
Banks have been doing brisk business lending money to government.
Small borrowers are paying usurious rates for mobile loans, some as high as 90 percent per annum. Indeed, the phenomenal growth of products such as MShwari, KCB MPesa, ‘Co-op Cash’ and others are partly attributable to the fact that banks have been busy circumventing the rate capping law.
The rate capping law has merely served to support the interests of the rich who are the ones who borrow from banks. Small people borrow from their phones.
If MPs are serious about lending rates down, let them force the Treasury to reform issuance of government securities.
We must go back to the idea of introducing primary dealers to allow the Treasury to take control of issuance of bills and bonds and to put the government in a position where it can apply leverage to influence the direction of interest rates.
Interest rates caps will not work until there is more competition in the banking system.
Rate caps hurt the poor.