Cap on bank deposits removed

Bank depositors were dealt a blow Thursday as Parliament voted to retain the cap on the lending rate and removed legal control of the savings rate.

Treasury secretary Henry Rotich. FILE PHOTO | NMG   

IN SUMMARY

  • MPs agreed to remove the legal requirement that lenders pay at least 70 per cent of the Central Bank of Kenya (CBK) base rate on deposits, putting the minimum saving rates at 6.3 per cent.
  • The removal of the savings rate control will hurt high-net worth investors who have been enjoying attractive returns on bank deposits since the introduction of rate caps in September 2016.

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Bank depositors were dealt a blow Thursday as Parliament voted to retain the cap on the lending rate and removed legal control of the savings rate.

MPs agreed to remove the legal requirement that lenders pay at least 70 per cent of the Central Bank of Kenya (CBK) base rate on deposits, putting the minimum saving rates at 6.3 per cent.

The removal of the savings rate control will hurt high-net worth investors who have been enjoying attractive returns on bank deposits since the introduction of rate caps in September 2016.

The MPs retained the four percentage points ceiling on loan charges above the CBK base rate, which now stands at nine per cent, defying Treasury secretary Henry Rotich’s proposals.

The rate cap was aimed at helping small traders access capital at affordable rates, but has had the opposite effect, with banks saying they cannot price risk to small and medium enterprises (SMEs) properly while the cap is in place.

As a result, lending to the private sector fell from 9.3 per cent in 2016 to 2.4 per cent last year, well below the ideal growth rate of 12-15 per cent, according to the CBK. President Uhuru Kenyatta said in April that he recognised the limitation of the law and hoped that the Finance Bill would remove the cap that he said had ended up hurting the financial sector. The legislation still needs to secure presidential assent, and it was not clear what line Mr Kenyatta would now take.

The International Monetary Fund had also insisted on scrapping the rate or modifying it in return for its support to Kenya.

On Thursday, Jan Mikkelsen, IMF’s Resident Representative for Kenya, said they were aware of the passing of the Bill and were assessing implications. MPs who contributed to the debate said that the caps should be maintained to protect borrowers.

READ: Depositors get raw deal in bank interest

“We have however removed capping on deposits because we don’t think many Kenyans have excess money to put on fixed deposit terms,” said Jude Njomo, the architect of the rate capping law.

John Mbadi said: “What will happen if we scrap the rate caps for those who have borrowed loans under the current regime? We cannot go back to where we were before the introduction of the rate caps. Banks are still making huge profits even with the caps.”

Equity Bank Group #ticker:EQTY chief executive James Mwangi earlier warned that failure to scrap interest controls would send shock-waves among “optimistic” businesses.

“What they (MPs) will be doing is continue marginalising Kenyans who cannot get bank loans and leaving them to borrow from Shylocks at about 30 per cent per month, telecoms at five per cent per week or from microfinance institutions that charge them up to 48 per cent,” Mr Mwangi said.

“Basically, they will be throwing Kenyans under the bus.”

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