advertisement
News

Rate cap ends after House quorum hitch

Central Bank of Kenya
The Central Bank of Kenya building in Nairobi. FILE PHOTO | NMG 

President Uhuru Kenyatta’s bid to remove a cap on commercial lending rates was passed in Parliament Tuesday following a quorum hitch, potentially boosting the flow of credit to the economy and return of expensive credit.

Speaker of the National Assembly Justin Muturi Tuesday said there was no quorum to overturn the President’s order, giving Mr Kenyatta’s amendments an automatic passage.

There were only 161 lawmakers present at the time of voting on the President’s amendments, which fell below the threshold required to retain the cap on lending rates.

Lawmakers required a two thirds majority — or 233 lawmakers — to overturn Mr Kenyatta’s memorandum on the amendments and retain the cap introduced in September 2016.

Mr Kenyatta had on October 18 refused to sign the Finance Bill, which proposes taxes for funding the government’s annual budget, demanding that lawmakers repeal the cap.

advertisement

In the amendments to the rate cap legislation, legislators shielded existing loans from higher interest rates once the cap is repealed, meaning that only new loans will be affected by the high interest rates set to follow.

The removal of the cap looks set to expose borrowers to high lending rates, which had touched a high of 25 percent before introduction of the ceiling, increasing the burden of servicing loans by individuals and small businesses. This means that banks will have their way in pricing the interest rate on loans.

The Treasury, Central Bank of Kenya (CBK) and the country’s banks have blamed the rate cap for curbing private sector lending growth and reducing the effectiveness of monetary policy.

Their argument is that the cap has cut private-sector loan growth because banks have avoided lending to customers deemed as risky, including small and medium-sized businesses as well as individuals who borrow for consumption

The cap has also had an impact on the wider economy as credit-starved businesses have had to freeze expansion plans and lay off staff, ultimately hurting growth. Lawmakers had in September 2016 capped interest rates at four percentage points above the benchmark central bank rate — currently nine percent —saying they were concerned about high loan costs.

Kiambu MP Jude Njomo, who was behind the rate cap law, accused CBK Governor Patrick Njoroge of siding with the banks.

“Even before the presidential memo was made public, the Central Bank Governor Patrick Njoroge went to New York and announced to IMF that the cap had been removed. Whose interest is he representing?” Mr Njomo posed yesterday.

Analysts expect the news of removal of the caps to back the rally in banking stocks at the Nairobi Securities Exchange (NSE), which have surged since October 17 when news leaked of the possible removal of the cap,

All the 10 banks listed on the Nairobi bourse gained on what stock dealers linked to increased demand for the lenders shares on the expectation of increased profitability and stock gains.

The Kenyattas, Equity Bank #ticker:EQTY CEO James Mwangi and the family of late Central Bank of Kenya governor Philip Ndegwa are among the individual investors who gained most from the rally in bank stocks.

Equity share has jumped 26.7 percent since October 17 to close trading at Sh47.65 Tuesday, while Co-operative Bank #ticker:COOP gained 26.5 percent to trade at Sh15.75, KCB #ticker:KCB (17.9 percent) and Stanbic (20 percent). KCB Group gained 21.5 percent, NCBA #ticker:NIC (16.3 percent) and Co-operative Bank (16.9 percent), I&M Bank #ticker:I&M (20 percent) and Stanbic #ticker:CFC (20 percent).

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 Sh111.3 billion net profit, eclipsing the Sh102.2 billion they made in 2016, which was the last year of trading before the rate cap. The profits dropped to Sh100.2 billion in 2017.

advertisement