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Kenyan government repeals banking act that caps interest rates

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On Tuesday, 12 November 2019, Kenyan banks welcomed the decision of the government to repeal the banking act that provides for the capping of bank interest rates.

Since the introduction of the lending caps three years ago, Kenyan banks shied away from lending to SMEs and individual borrowers. Instead, they opted to lend to the government, which was borrowing heavily from the domestic market.

This led to the mushrooming of Shylocks and other unregulated lenders, who took advantage of the effects of capping to lend to desperate citizens. The lenders did so at exorbitant rates in a predatory manner, compounding the already existing problem.

This forced President Uhuru Kenyatta to mitigate the negative effects of the legislation when he returned the Finance Bill 2019 to the National Assembly. He cited an overall slowdown in bank lending to the private sector which has impacted on businesses, especially MSMEs, and households, as the reason for his decision.

“We, therefore, welcome the repeal of the interest rate cap, which the President assented to on 7 November 2019, as it provides an opportunity for banks to direct more capital to the private sector. [This is] in line with the new risk-based pricing regime that has been articulated in the Banking Sector Charter that was published by Central Bank of Kenya earlier this year,” said the chairman of the Kenya Bankers Association, Joshua Oigara.

However, there have been concerns that Kenyan banks will revert to lending loans at higher interest rates.

Before the capping, Kenyan banks were charging as high as 24 percent, with many Kenyans accusing the banks of being exploitative.

In 2016, Kenyatta signed a bill into law that will cap high-interest rates offered by Kenyan banks at four percent above the Central Bank Benchmark Rate, which currently stands at 10.5 percent.

“We recognise the concerns raised by Members of Parliament regarding how the industry will respond to the removal of the interest rate controls and would like to assure the banking public that banks will abide by the law,” noted Oigara.

– APA

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