Economy

Sh1m fine for borrowers who ignore interest caps

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Kiambu Town MP Jude Njomo (right) with Kenya Bankers Association CEO Habil Olaka in the past. FILE PHOTO | NMG

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Summary

  • The proposed law change seeks to impose the penalties to all persons in breach of the cap in lending rates as opposed to the current legal regime that punishes banks and their CEOs.
  • The law change was published weeks after the Treasury sponsored a bill that seeks to repeal the legal restriction on commercial lending rates.

Borrowers will be fined up to Sh1 million or jailed for a maximum term of one year if found to have accepted loans above the rate cap if Parliament adopts a bill that seeks to entrench legal limits on lending rates.

The proposed law change seeks to impose the penalties to all persons in breach of the cap in lending rates as opposed to the current legal regime that punishes banks and their CEOs.

The law change — sponsored by Jude Njomo, the legislator who introduced the cap law —was published weeks after the Treasury sponsored a bill that seeks to repeal the legal restriction on commercial lending rates.

“As it stands, the penal provision under subsection (3) is couched in discriminatory terms as it applies only to banks and financial institutions yet the legal obligation is aimed at both the bank/financial institution and the borrower/customer… amendment) is therefore necessary as it seeks to create a penal provision that is not discriminatory,” Mr Njomo said in the memo attached to the bill.

Introduced in September 2016, the cap limits lending rates to 4 percentage points above the central bank rate, now 9.0 percent. It was supposed to cut the costs of credit for businesses and private consumers, boosting access to loans.

In his Budget Speech to Parliament last month, suspended Finance Minister Henry Rotich proposed repealing the cap.

He said it was keeping banks from lending to customers they considered too risky.

A similar attempt to remove the cap last year was rejected by the lawmakers.

The new bill published July 5 is seen as an attempt to reinforce the rate cap and make it constitutional in line with a March High Court order.

Private-sector credit expanded by 5.2 percent in the year to April, the central bank said, well below the ideal growth rate of 12 percent to 15 percent.

In March, the High Court gave Parliament a year to redraft the law capping rates, saying the original law was vague and that terms like ‘credit facility’ and the ‘Central Bank Rate’ (CBR) are open to misinterpretations.

In the latest draft bill Mr Njomo appears fix the wording in line with the High Court’s ruling with ‘credit facility’ now reading ‘loan’ and defining the ‘rate’ as the one captured under section 64 of the Central Bank Act.