Are you a high-risk bor­rower? New plan to make you pay more

Law on cap­ping has failed to al­low ac­cess to aford­able credit

The East African - - FRONT PAGE - By JAMES ANYANZWA The Eastafrican

Kenya’s Na­tional Trea­sury is work­ing on a pro­posal that will reg­u­late all lenders, in­clud­ing banks, in a bid to make credit more ac­ces­si­ble and af­ford­able.

The Eastafrican has learnt that the pro­posal is part of a re­sponse to the in­ter­est rates cap­ping passed by par­lia­ment in 2016 that has been broadly seen as not achiev­ing the ob­jec­tive of al­low­ing ac­cess to credit at af­ford­able rates to bor­row­ers.

The pro­posal is among sug­ges­tions con­tained in the Fi­nan­cial Mar­kets Con­duct Bill 2018.

Kenya’s Na­tional Trea­sury is work­ing on a pro­posal that will reg­u­late all lenders, in­clud­ing banks, in a bid to make credit more ac­ces­si­ble and af­ford­able.

The Eastafrican has learnt that the pro­posal is part of a re­sponse to the in­ter­est rates cap­ping passed by par­lia­ment in 2016 that has been broadly seen as not achiev­ing the ob­jec­tive of al­low­ing ac­cess to credit at af­ford­able rates to bor­row­ers.

The pro­posal, which will in­volve look­ing at bor­row­ers with dif­fer­ent risk profiles to en­sure lend­ing rates are based on them, is among sug­ges­tions con­tained in the Fi­nan­cial Mar­kets Con­duct Bill 2018.

“For a long time, mar­ket con­duct of lenders has not ben given suf­fi­cient at­ten­tion. This Bill is ad­dress­ing this as part of ef­forts to make credit af­ford­able to all bor­row­ers, based on their profiles. For ex­am­ple, salaried em­ploy­ees should be con­sid­ered less risky than oth­ers who do not have a pre­dictable in­come on a monthly ba­sis,” Dr Ge­of­frey Mwau, a direc­tor-gen­eral at the Bud­get, Fis­cal and Eco­nomic Af­fairs Depart­ment in Kenya’s Na­tional Trea­sury told The East African.

He added: “We are look­ing at dif­fer­en­ti­ated rates for dif­fer­ent peo­ple de­pend­ing with their risk profiles to en­sure that peo­ple are not over­charged. The pro­posal is still un­der dis­cus­sion.”

Cur­rently, most lenders charge bor­row­ers a fixed rate re­gard­less of their risk profiles, a sit­u­a­tion that has en­cour­aged banks to shun lend­ing to in­di­vid­u­als and SMES, which they consider high risk, and di­rect their lend­ing to large cor­po­rate bor­row­ers and gov­ern­ment.

To ad­dress this, the Na­tional Trea­sury is also im­ple­ment­ing a credit guar­an­tee scheme, by de­vel­op­ing the law and in­sti­tu­tional frame­work that will en­sure SMES and more risky bor­row­ers ac­cess credit at af­ford­able rates.

This will in­volve the gov­ern­ment work­ing with other stake­hold­ers.

“Over time, through this scheme, banks and other lenders will know who is risky and who’s not. The gov­ern­ment will also work with credit ref­er­ence bu­reaus to en­sure in­for­ma­tion about bor­row­ers is stan­dard­ised and re­ported ap­pro­pri­ately,” Mr Mwau added.

The Na­tional Trea­sury is con­sult­ing and seek­ing the in­put of banks, Members of Par­lia­ment and other stake­hold­ers with a view to com­ing up with a “more re­al­is­tic” solution to ac­cess to credit at an af­ford­able rate.

This, ac­cord­ing to Dr Mwau, will in­volve amend­ment to dif­fer­ent laws to avoid any in­con­sis­ten­cies in the laws gov­ern­ing the lend­ing sec­tor.

Kenya has fixed the lend­ing rates for banks at four per­cent­age points above the pre­vail­ing Cen­tral Bank Rate (CBR) fol­low­ing the en­force­ment of the Bank­ing Amend­ment Act 2016 in Septem­ber 14, 2016. How­ever, this Act does not reg­u­late non-de­posit tak­ing lenders and mo­bile money lenders, many of whom have taken ad­van­tage of the sit­u­a­tion to charge ex­or­bi­tant rates.

The Bank­ing Act also re­quires banks and fi­nan­cial in­sti­tu­tions to dis­close all charges and terms re­lat­ing to a loan be­fore grant­ing it to a bor­rower and caps min­i­mum in­ter­est rates on de­posits at 70 per cent of the ex­ist­ing CBR.

Last week Cen­tral Bank’s Mon­e­tary Pol­icy Com­mit­tee (MPC) re­tained the bench­mark lend­ing rate at 9.5 per cent set­ting lend­ing rates at 13.5 per cent.

The Bill for the con­trol of in­ter­est rates was in­tro­duced in par­lia­ment as pri­vate members Bill by the Ki­ambu town­ship leg­is­la­tor Jude Njomo af­ter com­mer­cial banks re­fused to heed to the gov­ern­ment call to lower their lend­ing rates which had sky­rock­eted to as high as 30 per cent in 1994 and over 25 per cent in 2011.

Be­ing a pri­vate members Bill for­mer At­tor­ney Gen­eral Prof Githu Muigai said it would only take the in­ter­ven­tion of par­lia­ment to re­view or abol­ish the rate cap law.

How­ever last week Mr Njomo told The Eastafrican that par­lia­ment would not al­low any Bill that seeks to re­view the in­ter­est rate caps and that the ac­tion by banks to freeze credit to the pri­vate sec­tor is a well cal­cu­lated move for this law to be re­con­sid­ered.

“I don’t think any­body is ready to re­view the caps apart from the banks. I have talked to my col­leagues in the house and I don’t think any­one of them is will­ing to re­view. Who­ever was draft­ing the Fi­nance Bill 2018 read the mood of the coun­try and knew that if he/she in­cluded the pro­vi­sions to re­view the rate caps, the whole Bill would col­lapse on the floor of the house,” said Mr Njomo.

The IMF and the World Bank have in­structed Kenya to re­view the rate caps ar­gu­ing the leg­is­la­tion has sti­fled credit to the

Salaried em­ploy­ees should be con­sid­ered less risky than oth­ers who do not have a pre­dictable in­come on a monthly ba­sis.” Ge­of­frey Mwau, Na­tional Trea­sury

pri­vate sec­tor while the Cen­tral Bank ar­gues that the law has re­duced the ef­fec­tive­ness of its mon­e­tary pol­icy in­stru­ments of con­trol­ling money sup­ply in the econ­omy.

Kenya com­mit­ted it­self to re­view the rate caps dur­ing its dis­cus­sion with the IMF in March this year that led to the ex­ten­sion of its $1.5 bil­lion pre­cau­tion­ary fa­cil­ity whose re­view was post­poned last year.

Al­though the fa­cil­ity was ap­proved the IMF would be com­plet­ing its out­stand­ing pro­gramme reviews of Kenya’s econ­omy by Septem­ber this year.

In April this year the par­lia­men­tary Fi­nance Com­mit­tee re­jected CBK Gover­nor Pa­trick Njoroge’s re­quest to re­move con­trols on in­ter­est rates ar­gu­ing move was meant to please the Bret­ton Woods in­sti­tu­tions at the ex­pense of bor­row­ers.

While the cur­rent lend­ing rate in Kenya is capped at 13.5 per cent in­ter­est rate on Trea­sury bills has av­er­aged 13.95 per cent from 1991 un­til 2018, reach­ing an all-time high of 84.67 per cent in July of 1993 and a record low of 0.83 per­cent in Septem­ber of 2003. This sounds ap­petis­ing for banks to lend to the gov­ern­ment.

Pic­ture: File

Nairobi-based San­ab­ora De­sign House Ltd. Banks shun lend­ing to in­di­vid­u­als and SMES as they are con­sid­ered risky.

Newspapers in English

Newspapers from Kenya

© PressReader. All rights reserved.