Borrowers braced for higher loan costs in rate caps law repeal
National Treasury Cabinet Secretary Henry Rotich poses for a photo outside The National Treasury Building ahead of the 2018/19 budget presentation at Parliament on June 14, 2018. PHOTO | DIANA NGILA | NMG
Consumers Federation of Kenya (Cofek) has criticised Mr Rotich for unshackling banks.
The market’s reaction to Mr Rotich’s reforms will be seen on Monday when NSE trading resumes
Treasury Secretary Henry Rotich has moved to repeal the interest rate controls that came into effect in September 2016, setting borrowers up for higher loan costs.
Mr Rotich said the decision, which is expected to boost banks’ profitability in the coming months, is meant to support economic growth by reviving lending to the private sector.
The enactment of the rate caps law in September 2016 saw the banks increase their investment in government bonds and T-bills, resulting in a major slowdown in lending to the private sector that stood at 2.8 per cent in February.
The banks have argued that the rate caps have made it impossible to profitably accommodate riskier borrowers within the set maximum interest rates – currently standing at 13.5 per cent.
Mr Rotich is seeking to remove the rate caps by taking away the Central Bank of Kenya’s powers to enforce the interest rate ceilings, effectively leaving banks to freely price loans.
“In order to enhance access to credit and minimise the adverse impact of interest rate capping on credit growth while strengthening financial access and monetary policy effectiveness, I propose to amend the Banking (Amendment) Act, 2016 by repealing Section 33B of the said Act,” Mr Rotich said in his budget statement to Parliament.
The part of the law targeted for deletion requires the CBK to enforce lending rates at a maximum of four percentage points above the base rate — officially the Central Bank Rate (CBR) — that is set periodically.
In its current form, the law also prescribes a minimum return of 70 per cent of the base rate on interest-bearing bank deposits.
Consumers Federation of Kenya (Cofek) criticised Mr Rotich for unshackling banks, adding that the minister’s promise of protecting small and medium-sized firms through a credit guarantee scheme rings hollow.
“It is wrong that Mr Rotich has bowed to pressure from the International Monetary Fund (IMF) and local banks at the expense of consumers,” the advocacy group said in a statement.
“We urge MPs to veto the proposal with the contempt it deserves. The matter is actively in court,” Cofek said, adding that the proposed credit guarantees as well as a Bill to protect consumers from predatory lenders are a tokenism.
Mr Rotich said the government will work with the private sector to implement the credit guarantee scheme for SMEs.
A Financial Markets Conduct Bill, 2018 is also in the works to curb predatory lending practices, including deceptive pricing of credit and abusive collection tactics.
If Parliament passes Mr Rotich’s proposal, banks will once again be at liberty to set interest rates according to their own risk assessments, a move that will instantly boost their earnings from an upward re-pricing of existing loans.
Prior to the rate caps, interest rate on some bank loans topped 20 per cent, with individuals and shaky companies taking the most expensive debt.
Finance costs
Some of the companies whose finance costs could go up significantly in an unregulated lending market include Uchumi Supermarket, Home Afrika, ARM Cement, East African Cables and Deacons.
Under the free market regime that preceded the rate caps, these companies borrowed at interest rates of between 15 and 19 per cent.
For Mr Rotich, scrapping interest rate controls should give the economy a boost as an increase in credit availability encourages investment and consumption by firms and individuals.
The legislation also helps the government to deliver its promise to the IMF, which had suspended a $990 million (Sh99 billion) credit facility that Kenya had arranged to ride out temporary economic shocks.
The market’s reaction to Mr Rotich’s reforms will be seen on Monday when trading on the Nairobi Securities Exchange (NSE) resumes after taking a break today for Idd-ul-Fitr celebrations.
Small banks hardest hit
Small banks that relied almost entirely on interest income have been the hardest by the rate caps, reporting a mix of losses and major profit declines.
Kenya’s largest banks, including KCB, Equity and Co-op Bank, have reported profit growth in the first quarter, with the rate cap removal expected to further fuel their earnings going forward.
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