Three years ago, when Parliament passed the interest rate cap, I remained a strong advocate for the repealing the interest rate cap. But when the repeal happened last week I was not entirely in support because we have not addressed the problem that led us to that position.
One of the main reasons the capping garnered a lot of public support is because bank customers felt that lenders were extending predatory lending rates to them and there was no one to look out for their interest.
The average lending rate before the capping was 18 percent when the 91-day Treasury Bill was at 8.6 percent, demonstrating the exploitative pricing of loans.
In 2014, Central Bank of Kenya (CBK) introduced the Kenya Bankers Reference Rate (KBRR), a base rate that was to be used by commercial banks and mortgage financing companies to price all credit facilities.
The KBRR was calculated as an average of the lowest interest rate charged by the CBK on loans to banks and the 91-day Treasury Bill rate. This was an attempt to enhance transparency in pricing credit, since commercial and mortgage financing companies would disclose to their borrowers and CBK breakdown of their deviation from the KBRR. Unfortunately, it never worked as expected, pricing of loans remains far above the KBRR and it’s for this reason that media reports have branded the move to repeal the cap as a return of expensive loan.
On the other hand, bankers have been on an overdrive managing that public perception by assuring customers that their loans will not be revised back to the exorbitant rates.
But banking on that promise will be putting your money on the wrong horse because the lead mover of the high interest rate regime in Kenya has actually been government borrowing at high rates from the local credit market and this is out of banks’ control.
Since the Jubilee administration came in, they have been reading over-ambitious budgets and to finance the huge deficits they have been borrowing heavily from local market pushing the base rate for commercial banks to price loans to customers unfavourably high even before the cap came into effect.
The Jubilee government has been borrowing an average of around Sh400 billion every year when the Kibaki government was around Sh100 billion. In this fiscal year, government has a budget deficit of Sh1 trillion and more than half of that will be borrowed from the local credit market. So, when banks say that they intend to provide cheap loans, it will be foolhardy to bank on their words.
Now to broadly described the structural problem that led to the capping of the interest rate, it is about consumer protection within the banking sector, including the failure to address consumer complaints by government regulator. Retail customers are always the weaker parties in transactions, so they always deserve protection.
At some point we tried regulatory shaming, where banks were listed according to the lending rates they extend to their customers but we still didn’t solve the structural problem.
Internationally, the market conduct (consumer protection oversight) regulation is being separated from prudential regulation after the rise of financial consumer protection oversight gained momentum in the early 2000s as the methodology being developed and adopted.
Prudential regulation is what CBK is performing, its core mandate in managing monetary policy, which there means we will have to separate market conduct regulation from it because the two regulatory policy sometimes clash and its best for the two interest to be represented by separate authorities.
Now, an independent market conduct regulation means a court-like institution that supplement the court system and are available to the consumer easily and at a low cost include financial ombudsman and arbitral tribunal.
Sometime back, the Treasury introduced the Financial Market Conduct Bill, which proposed the establishment of the two bodies but its progress remains unknown. It’s time to revive that Bill to protect financial consumers.