House Committee rejects Treasury bid to scrap interest rate caps

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Cut-price logic - Interest-rate caps | The Economist

It now appears interest-rate caps are here to stay after Parliament’s finance committee, in a report to be tabled before the whole house for debate and possible adoption, rejected a proposal contained in the 2019/20 Finance bill to have the ceiling imposed on the maximum interest rates commercial banks can charge borrowers, removed.

By calling for a repeal of the interest rates capping law through the 2019/20 budget proposals, Treasury had argued that the legal requirement that banks do not charge borrowers more than 4% above the prevailing Central Bank Rate – now standing at 9%, had resulted in the lenders shying away from extending credit to individuals and private sector medium and small scale businesses, due to a perception that they are less likely to pay back, hurting the economy in the process. 

The Central Bank of Kenya argues that the cap possibly reduced the rate of economic growth by 0.4% in 2017, on account of the ensuing limited access to credit by the private sector.

MPs however content that removing the cap will only see banks revert to charging customers exploitative rates, upwards of 30% as was the case before the law was introduced.

They are however in the process of amending the interest rates capping law to remove any ambiguities in the language used, in line with a March High Court ruling in which they were given a year to legislate suitable remedial amendments.

“We are going to remove any ambiguities and still have the cap”, Seme MP Dr. James Nyikal said.

Analysts expect the whole house to readily adopt the report. However, it remains to be seen whether or not President Uhuru Kenyatta, who sides with the Treasury and CBK in vouching for removal of the cap, will give his assent. 

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Recently, the Kenya Bankers Association proposed a middle ground where the law would be retained, but with an amendment expanding the cap beyond 4% above CBR, to give lenders a healthier margin and added motivation to lend to the private sector. 

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