President Uhuru Kenyatta has declined to approve the Finance Bill and has instead asked MPs to scrap commercial lending rate caps that critics say have led to a credit squeeze.
Should MPs now agree with him and remove the cap, borrowers will be left at the mercy of banks on the one hand, while on the other, banks will have the freedom to price their loans depending on their risk assessment.
Mr Kenyatta is in agreement with the Treasury and the Central Bank of Kenya that the interest rate cap is hurting the economy.
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 notice from State House for repeal of the law that imposes a cap on interest rates will be communicated to lawmakers today.
“The President has not assented to the Bill and has returned it to Parliament for review. The issue is the repeal of interest capping law,” Aden Duale, the Leader of Majority in the National Assembly, told the Business Daily Wednesday.
“The memorandum will be communicated to the House tomorrow afternoon (today) by the Speaker”.
This is a win for banks who have argued that the cap has slowed down their profitability and multinational agencies like the International Monetary Fund (IMF), which have called for scrapping or modification of the interest restriction law.
The government in September 2016 imposed the legal caps on lending rates at four percentage points above the Central Bank’s benchmark — currently nine per cent — and puts the maximum borrowing rate at 13 percent.
The removal of the cap looks set to expose borrowers to high lending rates, which had touched a high of 25 percent before the introduction of the ceiling.
Analysts expect the news of possible removal of the caps to spark a rally in banking stocks — which took a hit from the interest rate restriction — at the Nairobi Securities Exchange (NSE).
Repeal the law
It remains to be seen how law makers will react to the President’s recommendations to repeal the cap, given that MPs have twice rejected attempts by the Treasury to push for a repeal of the law that ushered in the caps.
Mr Kenyatta will seek to use his numerical strength in Parliament to marshal the numbers needed to override MPs and to repeal the law. On the other hand, MPs will require a two thirds majority — or 233 lawmakers — to overturn the President’s memorandum on the amendments.
The President’s Jubilee Party has a majority in the 349-member National Assembly but the dynamics in Parliament have changed since last year’s handshake between Mr Kenyatta and opposition leader Raila Odinga, which has seen lawmakers aligned to the two leaders close ranks on parliamentary business.
The two shook hands on March 9, 2018 after weeks of secret talks, ushering in a period of relative cooling of political temperatures that had hit fever pitch during the electioneering period of 2017.
Analysts believe the repeal of the rate cap is likely to sail through the House if the two leaders marshal their troops to rally behind the amendment that the President has proposed. However, only two weeks ago, MPs approved amendments to the Finance Bill, 2019 to entrench bank interest rate caps.
This sets the stage of a battle of wills between the Executive and the Legislature.
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 by banks, which argued that they were unable to price in risk in their customer loans.
As a result, they opted to withhold loans to risky customers.
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.
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 stand at Sh2.47 trillion, bank financial reports show.
Although on paper the law has helped tame high costs of credit, customers have found it difficult to secure loans from banks as a result of the shift to government paper. Annualised private sector credit growth rose 6.3 percent in August, which is well below the 12 to 15 percent minimum that CBK considers to be ideal to power a 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.