Kenya’s uphill task to review law on interest rates
NAIROBI - The Central Bank of Kenya (CBK) Governor Patrick Njoroge has heightened his pitch for deregulation of interest rates, saying that reversal of the year-old law is necessary because of the negative effect it has had on the economy.
But consumer lobbies and some economic experts now warn that while the subsequent credit crunch after the law was effected last September bear serious implications to the private sector, scrapping the controls may not be the panacea, and would in fact lead the country back to the era of high rates whose consumer outcry prompted the controls in the first place.
The Banking (Amendment) Act, 2016, which came into force on September 14 last year, caps loan charges at four percentage points above the Central Bank Rate (CBR), presently standing at 10 per cent, and requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.
President Uhuru Kenyatta last August defied critics and overruled some of his top advisers, including the CBK governor who publicly declared their opposition to the law, arguing that it would distort the market. Banks now say after this income from lending has fallen.
“Banks aren’t lending because they are not able to price in risk adequately into an interest rate so their margin of profit has shrunk on account of the rate cap as it doesn’t allow for full pricing of default risk by the bank,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers. Growth of credit to the private sector fell for the eighth straight month in May following the introduction of the law.
CBK data shows loans to the private sector fell further to 2.1 per cent over the 12 months to May this year down from the 2.4 per cent recorded in April.
Private sector credit, however rose to 1.6 per cent in August from 1.4 per cent in July, but far from the over 17 per cent in December 2015. Njoroge has argued that commercial banks in a post rate cap environment have to be “more disciplined in the pricing of loans so as not to overcharge borrowers.” The caps shaved Sh26.3 billion off commercial banks’ lending income in the first six months of the year, setting them for lower profitability this year.
– DAILY NATION, Kenya.