Uhuru signs Law capping Bank interest
By Kenya Confidential Financial Editor – Nairobi, August 24, 2016
Kenyan Banks have been making billions of shillings even in the worst economic environment by charging high interest rates on loans and offering just a fraction of interest to depositors
President Uhuru Kenyatta today assented to the law capping interest rates on bank loans ending days of speculation by the financial sector and the public.
In a statement after endorsing the bill Uhuru said Kenyans had been disappointed and frustrated with lack of sensitivity by banks which levied huge interest rates.
The President said, “On July 28, 2016, the National Assembly passed the Banking (Amendment) Bill, 2015. The Bill intends to regulate interest rates that are applicable to banks’ loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits. In line with the Constitution of Kenya the Bill was presented to me, for appropriate action as required by law.
Since receiving this Bill, I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks. These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns.
This is the third time that the National Assembly is attempting to reduce interest rates to affordable levels. In the previous two instances, dialogue and promises of change prevailed and banks avoided the introduction of these caps. In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates.
Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers. Upon weighing carefully all these considerations, on balance, I have assented to the Bill as presented to me.
- We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms.
- We will closely monitor these difficulties, particularly as they relate to the most vulnerable segments of our population.
- Whilst doing so, my Government will also accelerate other reform measures necessary to reduce the cost of credit and thereby create the opportunities that will move our economy to greater prosperity.
- We recognize that banks have done much in the last decade in terms of innovation and promoting financial inclusion and look to their doing more in that direction.
- We also reiterate our commitment to free market policies in driving sustainable economic growth, to which we owe much of our success.”
Kenyan banks have been upbeat claiming they had agreed to cut their lending rates immediately as they seek to stave off a political plan to cap the interest rates lenders can charge. All Kenyan Banks have been insensitive to the suffering of indigenous investors robbed of their investments by auctioneers cartels run by their managers and directors who buy out properties of defaulters lumped with loans they never took.
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Kenyan lawmakers approved a bill limiting commercial lending rates at 4 percentage points above the central bank’s benchmark rate.
The Kenya Bankers Association, an umbrella body of lenders, and Kenya’s Central Bank both publicly opposed the Bill, with banks saying that such a cap would force them to stop lending to high-risk borrowers.
The association, which represents 45 banks including Barclays Bank of Kenya, Equity Bank and Kenya Commercial Bank,CFC Stanbic bank, Standard Chartered bank, last week said its members had agreed to reduce their interest charges by 100 basis points.
The group said it “seeks to offer practical solutions to the interest rates debate, while still retaining free market principles that are currently enjoyed by the private sector” and its chief executive called on Mr Kenyatta to refer the bill back to parliament.
The association added that its members had agreed set aside a combined Ksh 30 billion ($294m) to improve access to capital for small and medium-sized enterprises at concessionary rates.
The banks also agreed to no longer charge customers who close their accounts in order to encourage them to “shop around” among banks. Central Bank of Kenya has played the part of conveyor belt by licensing some Banks intended to rob the Kenyan economy and poor citizens billions of shillings then fold up.
Banks have been used politically to punish those who go against the grain of those in power and to reward those who support and defend oppressive governance. National Bank of Kenya was used to reward loyal civil servants and military personnel at taxpayers expense.
Parliament’s Bill was backed by various trade unions and by ODM-Cord leader Raila Odinga, who argued that high interest rates were leading investors to leave Kenya and move to neighbouring countries with lower lending rates.
“High commercial lending rates, often around 18 per cent or more, have stifled businesses and particularly killed upstarts such as youth projects,” Raila argued.
The KBA chief executive, Habil Olaka, said further discussion was warranted. “We believe that referral of the Bill to parliament will offer more room for dialogue and reason whose outcome will be mutually beneficial to all stakeholders in the sector,” he said.
Kenya’s Treasury boss Henry Rotich had opposed the move by parliament to cap commercial lending rates saying other measures being put in place that would help bring down borrowing costs over time.
Rotich, the finance minister, had said his ministry preferred to improve the transmission of monetary policy signals to commercial rates and the creation of a central registry for collateral to cut rates, rather than capping them.
“Our approach in this issue is to deal with the root cause of why interest rates are where they are in Kenya,” he said. To a large extent interest rates have been fixed by banks to make a quick kill.
The average lending rate was 18.2 percent last month, compared with 15.8 percent in July last year, the Central Bank said. The Central Bank cut its policy rate to 10.5 percent in May, having left it at 11.5 percent since July 2015.
Rotich said they were working to improve the Kenya Banks Reference Rate (KBRR) to ensure banks were pricing loans correctly.
Introduced by the government in 2014 to help rein in high costs of loans by offering a benchmark for banks to price their loans, the KBRR has been criticised widely for failing to help bring down interest rates.
“There is more room for refining the KBRR and banks are working on ensuring that the margins reflect the best pricing of loans,” the minister said without offering details.
Uhuru finally listened to Kenyans cry. Kenyan Banks have been making billions of shillings even in the worst economic environment by charging high interest rates on loans and offering just a fraction of interest to depositors. They have also exploited government bonds yielding high interest.