Don't usurp central bank’s role with a 'consumer protector'

Parliament firmly introduced the interest rate caps through the Banking (Amendment) Act, 2016 which came into force on September 14 that year. This popular stance came during an emotive electioneering period when the public was suffering from high cost of credit in the country. The amendment was seen as timely and a relief by Kenyans as it touched on the high cost of living.

Traditionally, international banking practices hold that interest rate caps have produced undesirable outcomes, most notably, reducing bank competition whilst increasing risk to financial stability. A report published by the Central Bank of Kenya (CBK) in March 2018, highlighted the progress so far regarding the rate caps. The CBK acknowledged that there was an overwhelming increase in demand for credit immediately following the capping of lending rates.

The report noted this also made the revenue structure of most banks to start shifting away from interest income to increased fees on loans all in a bid to offset losses in interest income. Additionally, most banks directed their lending in favour of the government and other large corporate borrowers, conversely closing the door on small and medium-sized borrowers whom they considered as risky investments.

That the introduction of the rate cap by Parliament infringed on the independence of the CBK as the sole regulator and overseer of the monetary policies in Kenya cannot be gainsaid.

Without a shadow of a doubt, the move was seen as a popular decision which aimed at sacrificing the “banking self-regulation” rule on the anvil of fervid desire to find instantaneous solutions to systematic problems; one which if not regulated in good faith and honesty may end up oppressing the borrowers.

The International Monetary Fund most recently while reviewing the performance of its Sh150 billion forex insurance resolved- that for Kenya to qualify for a further facility it must comply with its new reforms, including the scrapping of the bank interest rate caps.

This interestingly enough comes at a time when Treasury CS Henry Rotich has proposed in the amendment of the Finance Bill, 2018 to repeal the interest rate cap law. As a soothsayer would tell, the proposed amendments under the Finance Bill, 2018 came a few weeks after the draft Financial Market Conduct Bill, 2018 was introduced.

The latter Bill promotes a fair, non-discriminatory marketplace for access to credit, and provides for the establishment of uniform practices and standards in relation to the conduct of financial providers, including regulating the cost of credit.

The FMC Bill, which addresses itself as a financial consumer protector, establishes the Financial Markets Conduct Authority (FMCA), the Financial Sector Ombudsman and the Financial Sector Tribunal. Which begs the question; if you want financial providers to self-regulate, in a fair marketplace for ease of credit access, why then subject them to a further three-arm regulatory regime?

One of the main functions of the FMCA is to regulate and supervise the conduct of financial providers. The authority’s permission is also required before any financial provider sets any interest rates.

A reading of the Bill, which is seemingly a replica of what the CBK ought to do once its mandate is increased to regulate other financial lenders not within the ambits of the Banking Act, makes you wonder why we have the CBK a as the chief regulator of monetary policies in the country. Basically, the law is very clear (as the twitter pundits would say!)

Article 231 of the Constitution provides that the CBK shall be responsible for formulating monetary policies in Kenya and it shall not be under the direction or control of any person or authority in the exercise of its powers or in the performance of its functions.

However, this constitutional mandate is being ‘’usurped” by the creation of the FMCA, which is a parallel regulator from the CBK.

This new proposed law tends to hoodwink the financial providers while at the same time winning over the duties and functions of the CBK in regulating the financial sector.

And as my favourite nitpicker (Carol Musyoka) would call it, the Bill is nothing but a red-herring in a rate capping drama!

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