Most banks have proclaimed that they will retain the existing interest rates for the outstanding loans. FILE PHOTO | NMG
On November 7, 2019, President Uhuru Kenyatta signed the Finance Bill 2019 into law that specifically provided for the scrapping of the cap on interest rates for banks.
With the repeal of Section 3B of the Banking Act which put a ceiling on the lending rate to at most four percent above the Central Bank of Kenya (CBK) base rate, commercial banks and other financial institutions now have the liberty to vary their interest rates on loans.
The interest rate cap law came into effect September 14, 2016, aiming at making credit affordable to the ‘common man’, causing a decline in commercial banks’ profits.
The regulator listed private equity and insurance companies as significant financiers of property markets in Kenya. Other financing sources include mortgage finance companies, savings and credit cooperatives (Saccos), capital markets (Real Estate Investment Trusts), off-plan purchases and private sources.
The real estate sector being one of the major sectors of the economy has been largely affected by fluctuating interest rates and the scrapping of the rates will surely have a significant on the sector.
Interest rates drive the property market in a variety of ways including mortgage rates, capital flows, the supply and demand, capital and investors' required rates of return on investment.
Economic analysts believe that the new law will provide necessary credit particularly to the micro and small and medium enterprises that will in turn be a boost for job creation.
The president said the cap on interest rates had led to a decline in economic growth adding that it had led to an increase in shylocks as banks were giving out fewer loans.
According to the Kenya National Bureau of Statistics (KNBS) Micro, Small and Medium Enterprises (MSMEs) 2016 survey, MSMEs account for approximately 28.4 percent of Kenya’s GDP and with the cap repealed, experts opine that more enterprises will get access to loans as banks will have sufficient margin to compensate for risks in other loan products.
When businesses get access to credit facilities, they can rent spaces in developed places to serve their customers and as they grow they will also move to bigger and strategic places raising occupancy levels of buildings.
Interest rates will influence an individual's ability to purchase residential properties.
High interest rates are likely to depress the real estate industry as they translate into expensive mortgages. In 2011, mortgage rates averaged around 24 percent for medium-sized banks before the capping of the interest rates and the speculation by many property investors is that history will repeat itself.
On the other hand, higher interest rates reduce the market liquidity of real estate by making alternative investments more attractive to investors.
Way forward
It is expected that the recovery in credit markets will improve the commercial real estate cap rates. If credit is well channelled, it can benefit both the banking and the real estate sectors.
The government, through the Central Bank of Kenya, should deploy measures for effective policy effectiveness by adjusting the monetary policy rate in response to economic developments such as inflation and growth.
Most banks have proclaimed that they will retain the existing interest rates for the outstanding loans and have promised not to raise interest rates but that they will be affected by the existing and future money market conditions.
The writer is Head of Sales and Marketing Centum Real Estate.
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