Parliament signals it’s likely to keep rate ceiling in place

The latest move by Kiambu Town MP and chief architect of interest rate caps Jude Njomo to table amendments to the Banking (Amendment) Act, 2016, while largely preserving the cap, is the clearest signal rate ceilings are here to stay.

His changes are largely to comply with a High Court ruling issued in March 2019, which essentially declared the rate caps unconstitutional on the basis of being vague, imprecise and ambiguous.

I went through the ruling and the bench basically questioned the drafting quality of the legislation. Consequently, the court, while not suspending the law, gave Parliament 12 months to ensure compliance. The ruling was basically a form of judicial review.

The amendments tabled by Njomo have some three key propositions: first, it clarifies that the interest rate under reference is to be computed or applied on an annual basis.

The High Court had castigated the legislation for being vague as to the period the four percent interest (charged above the Central Bank rate) is applicable, as it does not specify whether it is to be charged per day, per month or per annum.

Second, it has replaced the term ‘credit facility’ with the word ‘loan’’. This is in response to the bench’s ruling that the terms credit facility and loan cannot be used interchangeably and doing so can trigger different subjective interpretations.

Consequently, the court directed that, in order to remove the possibility of conflicting construction of the phrases, it is necessary that the term credit facility for purposes of Section 33B (1) be explicitly defined.

Finally, in the amendment, the MP reaffirms that the maximum interest rate charged by banks and financial institutions on loans should not exceed four percentage points above the base rate as set and published by the CBK (the base rate in this case refers to the Central Bank Rate or CBR).

Indeed, the bench had raised queries on the wording of Section 33B (1)(a), which reads as follows: the maximum interest rate chargeable for a credit facility in Kenya at no more than four percent, the base rate as set and published by the Central Bank of Kenya.

According to the bench, the provision is not clear whether the word “of” was intentionally left out by the drafters of the legislation. Could the words “at no more than four percent, the base rate” mean four percent above the base rate.

Additionally, there could also be a mischievous interpretation of the words “at no more than four percent, the base rate” to mean below the CBR.

These amendments will certainly set the tone for upcoming debate on Finance Bill 2019, especially on the proposal by the Treasury Cabinet secretary to repeal section 33B of the Banking (Amendment) Act, 2016.

Further, the amendment bill is likely to embolden Parliament’s position of unwillingness to remove the cap.

Essentially, rate cap is here to stay and commercial banks had better adjust, for those who are yet to do so three years into the capped operating environment.

In regards to the (lack of) funding of micro, small and medium enterprises (MSMEs), the Central Bank of Kenya should now move with speed and roll out the SME credit guarantee scheme, part of intervention schemes outlined by the Treasury Cabinet secretary in the fiscal year 2019/20 budget statement to Parliament.