President Kenyatta rejects retention of rate cap, CBK says

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President Uhuru Kenyatta
President Uhuru Kenyatta at a past event. PHOTO/COURTESY

By Bloomberg,

President Uhuru Kenyatta has rejected a bill that seeks to retain caps on interest rates that banks can charge on loans, paving the way for the removal of a law that’s been choking the economy, central bank Governor Patrick Njoroge said.

The yield on Kenya’s Eurobond due in 2024 fell 12 basis points to 5.44% by 12:27pm in the capital, Nairobi.

President Uhuru Kenyatta sent the Finance Bill back to parliament and won’t sign it as long at it provides for interest-rate limit, Njoroge said in an interview Wednesday in Washington.

In 2016, lawmakers approved the Banking Act, which limits the amount banks can charge on loans to 4 percentage points above the central bank rate. While it was intended to improve lending terms for consumers, it has instead made institutions more selective in who they provide money to, cutting into banks’ profit margins and sending people to borrow from unregulated microlenders at even-higher rates.

The Nairobi High Court annulled the banking law in March but suspended enforcement of the ruling for a year so lawmakers could review the legislation. A parliamentarian then proposed changes that clarify the extent to which banks can price loans.

In the 2019 Finance Bill, the Treasury recommended scrapping the law, but a parliamentary committee rejected that proposal and supported retaining the rate caps.

“The economy is being choked by interest-rate caps. If you want small and medium enterprises to continue strengthening and employ people, you have to let go of these interest-rate caps and that’s what the President Kenyatta wants,” Njoroge said.

Instead of boosting borrowing, private-sector credit growth slowed as banks preferred lending to the government. Njoroge and the central bank have been vocal critics of the rate caps, saying they complicate the transmission of monetary policy.

Parliament could agree with President Kenyatta and amend the bill to remove the rate caps, or could decide to push the bill through, which would require two-thirds support in the house.

“It’s very unlikely that they will come up with two-thirds of votes, so we believe that we are in a position, very soon, of overturning the interest-rate caps,” Njoroge said.

Lawmakers will debate and vote on the president’s memorandum in the next two weeks, Aden Duale, the National Assembly’s majority leader, said in a text message.

Lenders in Kenya have been wrestling with the uncertainty about how much they can charge for loans. Njoroge said he’s had conversations with banks and they understand “they can not take advantage” if rate caps are removed.

“They can not go back to the old way of behaving. They have to keep up with the times and be more customer-centric,” he said.

ALSO READ: Interest rate cap will not be repealed: Legislators

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