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This is what review on the law capping rates needs to address

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Central Bank governor Patrick Njoroge. FILE PHOTO | NMG

What a week. The United Kingdom hand-delivered the goodbye letter (that triggers Brexit) to the European Union (EU) headquarters in Brussels. Who doesn’t love a good old British-fashioned letter, anyway? Donald Trump ramped up his Executive Orders. Ghana revealed that the entire $1.8 billion in syndicated debt raised in 2016 from international banks to purchase cocoa from farmers for the 2016/17 season had disappeared (sounds very familiar!).

Mombasa Governor Ali Hassan Joho revealed that he scored a mean grade of D- in KCSE. President Uhuru Kenyatta cancelled two trips. And in matters economic, the monetary policy committee (MPC) of the Central Bank of Kenya (CBK) voted to retain its policy rate at 10 per cent—though they didn’t disclose the voting margins, offering no clue to dissent, if any. And of course, Treasury Cabinet Secretary, Henry Rotich, tabled his budget estimates for the fiscal year 2017/18.

Talking matters economic, the long-term viability of the banking (amendment) Act, 2016 was put into question this week. But it really just depends on who is talking. Last week, Treasury Principal Secretary Kamau Thugge seemed to downplay the effect of rate caps in triggering credit rationing. However, CBK Governor, in a post-MPC brief, hinted that the law maybe disabling the efficacy of policy signalisation. Treasury CS, on the other hand, seems to be crafting a way out of the law.

READ: EDITORIAL: CBK’s relook at interest rate capping law timely

ALSO READ: CBK acts on credit squeeze after rate cap introduction - VIDEO

Look, it is true that capping of risk-pricing has triggered cherry-picking behaviour by banks. Additionally, banks have had to withdraw from lending products they deem poorly risk-priced under the law — especially unsecured and semi-secured products. This is bound to continue until banks find a mechanism to properly ring-fence the obligor risks.

That said, I think the law needs to be given a chance. It may not be in its current form but we ultimately need to peel off the rent-seeking coats of banks and instead entrench their core utility function. The banking culture we have had since liberalisation has, over time, incubated predatory pricing. For instance we wouldn’t need the Act if banks had the culture of rewarding good borrowers.

Consequently, in my view, scrapping the law will not be a good idea. I still believe banks can co-exist with the law—however, not in its current form. We just need three adjustments to the Act.

First, the pricing cap, in my view, should only be applied to secured products — and to uniformise the application, CBK should be able to provide more guidelines on what would be considered as secured lending. The current blanket application appears to disable the market and hence the cherry-picking behaviour of banks.

Secondly, the blanket application of the deposit floor needs to go. Instead two things need to germinate out of it: one, its applicability should be explicitly restricted to savings accounts; and two, its applicability should be pegged on a minimum amount. For instance, the amendment can state that deposit balances below Sh10,000 are exempted from the pricing floor.

Finally, I don’t think it was a good idea to designate the Central Bank Rate, policy rate, as the applicable base rate for purposes of the Act. I still reiterate my view that there’s a need for a separate base rate.

Mr Bodo is an investment analyst [email protected]