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Deal with IMF set to raise cost of loans


Banks reacted to the law by shifting to lending to government. PHOTO | FOTOSEARCH

The Kenyan government has promised the International Monetary Fund (IMF) a repeal of the interest rate capping law, leaving consumers in a cloud of uncertainty over the future cost of loans.

The IMF said in a statement released after a three-week visit to Nairobi that Kenya has committed to reforming the law, and to cut the fiscal deficit in order to secure a six month extension of the Sh150 billion ($1.5 billion) standby facility that expires next Tuesday.

“In support of this request, the authorities have committed to policies that will help achieve the programme objectives, including reducing the fiscal deficit and substantially modifying interest controls. Discussions on the details of these policies will continue in the coming weeks,” said IMF team leader Benedict Clements.

Both the Treasury and Central Bank have come out in recent weeks to say that a review of the popular law is necessary, citing the slowdown in private sector credit growth (that stood at 2.4 per cent in December).

Borrowers, who paid exorbitant credit costs before rate cap came into force, will now be watching keenly to see how the Treasury navigates the sensitive and emotive issue either with a partial review or repeal.

Banks, however, made it clear that they want nothing short of total repeal of the law, arguing that they have put in place measures to prevent a return to the days of usury.

“We will be looking for a total removal of the cap. We now have in place a number of measures, some ongoing, addressing concerns around opacity in pricing of loans through the cost of credit website that allows borrowers to compare loan charges comprehensively across different banks,” Kenya Bankers Association (KBA) chief executive Habil Olaka said.

“Partial amendments to the law will only create more problems and complications going forward, sending us back to the negotiating table.”

The rate cap law was passed in August 2016 in response to the high cost of credit that saw banks make huge profits.

The lenders reacted to the law by shifting to lending to government, arguing that they were unable to price in risk for customers, especially SMEs which tend to carry a higher default rate.

Parliament’s Budget and Appropriations Committee chairman Kimani Ichung’wa, the MP for Kikuyu, told the IMF team on February 22 that legislators are willing to support a review of the law, on condition that CBK demonstrates that it is able to supervise banks to lend money at fair rates.

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