End of rate cap signals return to expensive loans

Milimani law courts. FILE PHOTO | NMG
Milimani law courts. FILE PHOTO | NMG 

The High Court has declared unconstitutional the section of the Banking Act that introduced controls on cost of loans, leaving borrowers at the mercy of Members of Parliament who have 12 months to amend the irregular clauses.

Justices Francis Tuiyot, Jacqueline Kamau and Rachel Ngetich ruled that Section 33 (B) (1) and (2) of the Banking Act is vague, imprecise, ambiguous and indefinite and therefore unconstitutional.

This effectively nullified the law that has seen consumers enjoy relatively low cost of loans for two years, capped at a maximum of four percentage points above the Central Bank Rate (CBR).

Banks have, however, denied loans to small and medium enterprise (SMEs) over the period, arguing that the interest rate controls denied them ability to price their default risk.

The three-judge Bench suspended for one year the effective date of the judgment regarding section 33 (B) (1) and (2) of the Banking Act, noting that it would have huge ramifications on existing contracts between banks and borrowers.


“Mindful of the possible ramifications and disruption on existing contractual relationships between banks and their customers, the court has suspended the effect of the declaration for 12 months from the date of this decision so as to give the National Assembly opportunity to reconsider the provisions,” read a summary handout of the ruling issued by the court Thursday.

The judges, however, declared immediately effective the striking out of Section 33 B (3) of the Act that spells out penalties on those who contravene the interest rates capping law.

One-year suspension

They said the section punishes only banks and their CEOs and not customers and other persons who contravene the provision.

MPS now hold the key to the cost that borrowers will pay for loans after lapse of the one-year suspension.

The court ruling, depending on the amendments that MPs will make in the 12-month period that the decision will be suspended, could usher the return to the era of costly credit for borrowers and hand banks victory in their campaign to be allowed to price credit freely.

The petition challenging the rate cap law was filed by a Mr Boniface Oduor at the Constitutional Division of the court in 2016, but it was later transferred to the Commercial Division.

The amendments to the Banking Act were introduced by Kiambu Central MP Jude Njomo through a Private Member’s Bill that was signed into law in August 2016, sparking a long fightback from banks which argued they were unable to price in risk in their customer loans.

The amendment capped the maximum loan rate at four percentage points above the prevailing Central Bank Rate (CBR) (currently at nine percent) and the minimum deposit rate at 70 percent of CBR.

MPs have in the meantime continually rejected proposals by Treasury Secretary Henry Rotich to repeal the rate cap law.

Partial amendment

The minister, however, managed to push through a partial amendment in the Finance Bill 2018 that did away with the deposit rate floor, but that has not been enough to revive credit growth to the private sector that has remained in the low single digits since 2016.

Banking sector financial performance data for the past four years shows that the lenders have managed to recover their footing after the initial hit from the rate cap, largely by turning to risk-free government lending and aggressively cutting costs.

In the year ending December 2018, banks made a record high Sh152.3 billion gross profit, eclipsing the Sh150 billion they made in 2016, which was the last year of trading before the rate cap.

The lenders grew their holdings of government securities by 51 percent or Sh398 billion to Sh1.17 trillion between the end of 2016 and September 2018.

In the same period, they only grew their loan book by 8.4 percent or Sh191 billion to Sh2.47 trillion, bank financial reports show.

Although on paper the law has helped tame high cost of credit, customers have found it difficult to access loans from banks as a result of the shift to government paper.

Annualised private sector credit growth has not gone above five percent since August 2016, which is well below the 12 to 15 percent minimum that CBK considers to be ideal to power healthy growth of the economy.


SMEs have borne the brunt of the credit rationing, hurting the economy since the sector is the biggest driver of jobs growth in the country.

The potential removal of the rate cap will, however, be welcome news to the CBK and Treasury, which have been grappling with how to have it repealed in order to get back in the good books of the IMF and access a new standby currency insurance facility.

The additional amendments to the law that have been proposed by Gatundu South MP Moses Kuria seeking to raise the lending ceiling for SMEs also hang in the balance now since the law he is seeking to amend has been declared unconstitutional by the High Court.