NAIROBI, KENYA, JAN 15 — Small and Medium-sized Enterprises (SMEs) in Kenya could soon have access to more credit if a proposed amendment to the Banking Act is upheld by parliament.
In a new twist of events, a Kenyan Member of Parliament-Moses Kuria has written to the National Assembly Speaker Justin Muturi seeking to table a bill to amend the Act, which has capped interest rates at four per cent above the Central Bank Rate.
The Gatundu South (one of the constituencies in Kenya) MP is seeking to introduce an amendment bill to the law which will allow flexible interests of up to six per cent above the CBR for SMEs.
The proposal also seeks to benefit persons perceived to be high risk borrowers by banks in the country, whom are said to have been locked out of credit under the current law which has seen banks prefer government securities over individuals and small businesses.
The amendment to the Banking Act will introduce an interest rates risk pricing negotiation window.
If passed, it will flex the 2015 Banking (Amendment) Bill signed into law by President Uhuru Kenyatta on August 24, 2016.
The law capped bank interest rates at four per cent above the Central Bank Benchmark Rate, currently at 9.0 per cent, ending an era of exorbitant profits for lenders in the country.
Local banks, comprising 42 commercial entities and a mortgage finance company, had for long enjoyed interest rates above the average global interests, going as high as 25 per cent.
The introduction of the law saw banks profile individuals as high risk borrowers, denying them credit. SMEs have also suffered under the regime as banks invest heavily in treasury bills and bonds.
The objective of those amendments was to check on excessive and punitive lending rates by the banks, protect depositors and discourage usury- the action or practice of lending money at unreasonably high rates of interest.
In his proposal, Kuria says though the law is well intended, the legislation has led to serious unintended consequences.
First, banks have withdrawn lending to the small and medium enterprises and unsecured individual borrowers. This is because the cap as it exists has removed the leg room for pricing risks.
Currently, credit to the private sector is growing at only four per cent slower than both the GDP and inflation, Kuria has noted.
“If nothing is done, our economy will dip into recession,” Kuria notes.
Secondly, the cap as it exists puts the interest rate in the same level as government paper-Treasury Bills and Treasury Bonds, the MP has said, hence banks are finding it more prudent to invest in the risk free government paper instead of lending to the private sector and especially the SMEs.
“This has had the effect of a ballooning domestic debt as Treasury’s debt appetite continues unabated. The spiraling debt is the single most threat to our economy and its distorting all fundamentals,” the MP told the national assembly speaker.
He is seeking to maintain a lending cap at four per cent above the CBR for low risk clients while introducing a risk negotiation window of up to six per cent above the lending cap for SMEs and unsecured individual customers.
This will allow lenders and borrowers in these clusters to negotiate prising based on their risk profile and on “a willing buyer, willing seller basis.”
“The amendment will go a long way to free credit to the SMEs, discourage government borrowing from the domestic market, drive private sector credit growth and spur fresh economic activity and growth,” the legislator argues.
Kuria is the vice chairman of the Parliamentary Committee on Transport, Public Works and Housing and a member of the Budget and Appropriation Committee.
If passed, banks can lend with interests of up-to 15 per cent , on the current CBR which stands and 9.0 per cent.
The Monetary Policy Committee (MPC) , CBKs decision making organ, retained the CBR at 9.0 per cent twice last year.
The committee said inflation expectations remained well anchored within the target range, and that the economy was operating close to its potential.
“The MPC concluded that the current policy stance remains appropriate, and will continue to monitor any perverse response to its previous decisions. The Committee therefore decided to retain the CBR at 9.00 percent,” it said during its meeting on November 27, 2018.
Despite an outcry by banks which has blamed the rate cap on a slowdown in credit and effects on economic growth, CBK argues that the banking sector remains stable and resilient.
“Average commercial banks’ liquidity and capital adequacy ratios increased to 48.9 per cent and 18.4 per cent, respectively, in October 2018. The ratio of gross non-performing loans (NPLs) to gross loans fell to 12.3 per cent in October 2018 from 12.7 per cent in August, largely due to declines in NPLs in the trade, and personal and household sectors. The declines were mainly due to sustained recovery efforts by banks,” CBK says in its report.
The regulator also says private sector credit grew by 4.4 per cent in the 12 months to October 2018, compared to 3.9 per cent in September, driven by strong growth in manufacturing, business services, finance and insurance, and building and construction, which grew by 14.9 per cent, 12.4 per cent, 9.1 per cent and 7.2 per cent, respectively.
Growth in private sector credit is expected to pick up gradually with the continued expansion of the economy, MPC said during its meeting, which was the last in the year 2018. It is expected to meet on January 28, to review the country’s macroeconomic conditions, and set a new CBR.
Coming into 2019, interest rates have averaged 13 per cent with banks continuing to invest in government securities while shying-off individuals, SMEs and anyone else they consider a high risk borrower, hence the new law could breathe a new life to these individuals.