With the plan to repeal the contentious interest rate capping law still in abeyance- and with a section of legislators sending signals that they will fight to have the caps retained, a sterile turf war between the CBK and the National Treasury was clearly a political miscalculation.
It seems that navigating the country back to repealing the interest rate capping law is going to require a lot more political dexterity on the part of both the National Treasury and the CBK.
I am strong supporter of operational independence of the CBK.
The controversy between the National Treasury and the Central Bank of Kenya (CBK) over the Financial Market Conduct Bill is distracting us from a more important problem we should be focusing on as a country-namely- the case for a sound and robust consumer credit legislation in Kenya. With the plan to repeal the contentious interest rate capping law still in abeyance- and with a section of legislators sending signals that they will fight to have the caps retained, a sterile turf war between the CBK and the National Treasury was clearly a political miscalculation.
It seems that navigating the country back to repealing the interest rate capping law is going to require a lot more political dexterity on the part of both the National Treasury and the CBK. I am strong supporter of operational independence of the CBK. I support a system where interest-rate policy is free of political manipulation. I believe that the fairly steady growth and long periods of low inflation regimes we have enjoyed in recent years are attributable to sound conduct of monetary policy by the CBK.
But I also believe that the CBK governor shot from the hip by over reacting on a perceived assault on the regulator’s turf by the National Treasury, completely ignoring that this whole thing about a strong consumer protection law was coming in a specific context. After all, the remit of our central bank is just too wide already.
It prints currency, licenses and supervises banks, manages and issues government securities - is in charge of monetary policy, owns the Kenya School of Monetary Studies and is- albeit indirectly- the power running the Kenya Deposit Insurance Corporation (KDIC) and the Financial Reporting Centre (FRC).
Granted, one can argue that KDIC and FRC are agencies of the National Treasury with their own boards, and run independently of the CBK.
But the fact of the matter is that in terms of effective power, the CBK is in charge of these institutions.
Indeed, most of the staff at these institutions are CBK employees. They run on resources provided by the bank. What is my point? It is that our central bank already has too much to chew to start fretting about losing turf.
When you give your central bank too many responsibilities- it is bound to find itself conflicted. For instance, having to continue borrowing from the market when monetary policy is pointing to a tightening of the stance.
After reading through the Financial Markets Conduct Bill, I do not see why the National Treasury and the Governor of the Central Bank of Kenya, Dr Patrick Njoroge, should be pulling in different directions over the bill. Yes, the bill proposes to introduce new and powerful players in the space of regulation of the financial sector.
The risk of having functional overlaps between the central bank and the institution being introduced into the space is –indeed-real.
For instance, if the bill is passed, we will have a completely new authority with extensive powers including the power to move into premises of financial institutions to conduct inspections. The bill also proposes to introduce a regime of interest rate controls.
The new authority being introduced will have powers to prescribe ceilings and floors for regulated credit contracts- covering a broad range of credit activity including hire purchase contracts, leasing contracts, instalment agreements and money lending contracts.
If the bill is passed, credit providers will be prohibited from engaging in misleading advertising that misrepresent the quality and price of the services they offer. The law also proposes to introduce a broad range of consumer rights, including the right to pre contractual information that allows consumers to make right choices, the right to redress in cases where service is delayed and right to reasonable notification for termination of service.
There must be a middle ground between the need for consumer credit legislation and the prudential functions of the CBK.
New consumer credit legislation anywhere in the world is always met with resistance because so many conflicting interests are at stake.
A balance must be struck between the need to protect the interests of consumers and the interests of shareholders of the credit institutions. The case for a legal framework for a strong consumer credit legislation regime in Kenya is very strong indeed. In South Africa, consumer credit is handled by the Department of Trade under a National Credit Act. The regime comes with regulated credit controls with emphasis placed on redress and consumer education.
Last year, Swaziland promulgated a consumer credit act covering a broad range of credit activity including leasing contracts and hire purchase. The turf war between the CBK and the National Treasury over the Financial Markets Conduct Bill is a red herring.
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