Three years after the Banking (Amendment) Bill, 2016, became law, it is time now for Kenyans to brace themselves for expensive loans.
The law dictated that commercial lending rates could not be more than four per cent above the Central Bank of Kenya (CBK) benchmark rate.
But now, borrowers are at the mercy of the exploitative banking sector after regaining the freedom to vary lending rates.
MPs desert parliament for law to pass
On Tuesday, November 5, 2019, parliamentarians deserted Kenyans giving President Uhuru Kenyatta a victory in his decision to repeal the interest rates cap.
As is the tradition when important matters affecting Kenyans are being discussed, only 161 MPs were present to vote. It is a constitutional requirement that any law that needs amending has to have at least 233 MPs supporting it for it to pass.
By failing to overturn Kenyatta’s reservations on the Finance Bill, 2019, parliament gave banks, Central Bank of Kenya, the International Monetary Fund and the World Bank a big win. These entities have been lobbying against capping the rates.
The rates cap law was brought by Kiambu MP Jude Njomo. On Tuesday, aware of the possibility that the president memo on the repeal would pass, said that he would be watching the banks’ behaviour in a post rate environment.
As of May 2019, data from the Kenya Bankers Association (KBA) shows that the lenders cumulatively have Ksh4.6 trillion in loans and Ksh3.4 trillion in customer deposits.
The banking sector which was rogue on interest charged on loans before the rate caps has promised to behave in line with the Banking Sector Charter of 2018 which they adopted in March.
Lenders have committed to fostering transparency in loan issuance by making clear what the cost of the loans would be.
The CBK Governor Dr Patrick Njoroge who was opposed to repealing the rate caps said in May that banks need to do the right thing.
“We have done quite a lot in effect to deal with the fundamental question that led to the introduction of the rate cap. Maybe it was the way to bring the sector together,” he said.
ICPAK wants interest rate cap law for two more years
In September, the accountants were pushing for a two-year extension on the law capping interest rate saying its full benefits are yet to be realised.
The Institute of Certified Public Accountants of Kenya (ICPAK) told Parliament the law on rate caps has instilled discipline in the economy in general.
“Our proposal is that the interest rates are capped for another two years to allow full realisation of their intended purpose,” ICPAK public tax committee chairman Phillip Mwema told the National Assembly Finance committee during public hearings on the Finance Bill on Thursday.
Mwema noted that the law capping interest rates has instilled discipline amongst borrowers, explaining a drop in auctioning incidents.
“The capping has protected naïve and ignorant borrowers from agreeing to loan terms that they would eventually default,” he said.
Law capping rates unconstitutional
In March this year, the High Court gave parliament a year to amend a section of the law capping rates after ruling that it was unconstitutional.
In the ruling, the court accused MPs of targeting banks with the cap while not considering the behaviour of borrowers. The court added that some of the terms used in the law were ambiguous.
With the rate capping law, most banks have been lending at a maximum of 13 per cent rate from a high of up to 27 per cent before 2016.
In September last year, the Finance Ministry attempted to remove the caps but it was blocked by lawmakers.
And just a day after the repeal, Kenya’s biggest bank by assets KCB said that customers should not expect a sudden increase in the interest rates following the amendment of the Finance Bill, 2019.
“The regime of the 20 per cent interest rate is long gone. The macroeconomic and business environment where we are today does not at all support an environment of high rates,” said Joshua Oigara, who is the bank’s Chief Executive Officer and also the KBA Chairman.
He said allowing banks to price the risk of borrowers is important and the banking industry has over the last two years learnt a number of lessons in that regard.
“As an industry, we are in a new equilibrium. Banks have reached a new business model. We lend to current customers at 13 per cent because we have accepted their risk profile as an industry. That will not change the next day. So the fear that there will be a massive repricing the next day is not true,” Oigara opined.