If you lend money to any of my people who are poor among you, you shall not be like a money lender to him; you shall not charge him interest. (Exodus 22: 25) Why then did you not put my money in the bank, that at my coming I might have collected it with interest? Luke 13-26
From the time the banking operation started in Kenya in 1906 until 1992 i.e. 86 years the interest rates were capped. The banks made reasonable profits and most of them prospered. From 1993 the banks started making abnormal profits. In economics abnormal profits is defined as unfair profits derived from privileged position. This is different from windfall profit which comes from an act of God e.g. sudden change of trading conditions or change of weather destroying a competitor’s crop in case of farming. In the year 2000 the Donde Bill tried to redress the situation obtaining from 1993 but received very hostile response from the banks. Through the umbrella Kenya Bankers Association the banks went to Court and managed to stall the process.
Mid 2016, the Kenya Government established interest rate ceilings to protect consumers largely in response to political pressure, although the CBK was against it. Interest rate cap on loans at four percentage points above the base rate published by the Central Bank of Kenya (CBK), Kenyans were full of hope and expectations of lower interest on their loans and higher earnings on deposits. The general idea is that interest rate ceilings limit the tendency of some financial service providers to increase their interest yields especially in markets with a combination of no transparency, limited disclosure requirements and low levels of financial literacy. Interest rate caps are one of those things that sound too good to be true. Why is it failing in Kenya?
Despite good intentions, interest rate ceilings have actually hurt low-income populations by limiting their access to finance and reducing price transparency.
The ceilings have been set at four percent, financial service providers have found it difficult to recover costs and started growing more slowly, reduce service delivery in rural areas and other more costly markets, become less transparent about the total cost of loan, and even exit the market entirely which most banks have considered.
Well for the local mwanaichi things have got tougher, they have been forced to consolidate most of their assets in order to meet the minimum threshold of acquiring investment capital. These are some of the things that our political leaders should step up their game and come up with programmes or development initiatives to educate its people.
More bank staff have been laid off, SME sector has collapsed, lack of enterprenual initiatives among the youths. This worrisome behaviour by Kenyan banks is likely going to create an opportunity for unregulated MFIs such as Shylock whose main focus is clients located in and rural settings. Banks are looking for other ways of making profits to break even.
Initially it was easy for the banks to give money as they relied on the pool of many customers and interest profit to counter non-performing loans but now financial institutions are forced to go back to the drawing board. Banks are now forced to be more aggressive to increase their liabilities book unfortunately this has also been infiltrated by insurance companies, microfinance and real estate investment companies. There is a strong need for policymakers to understand the interest rate curve, especially when dealing with financial service providers targeting low-income people.
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Note: The results are not exact but very close to the actual.
