The banking sector has come out to calm nerves in the financial markets over fears of possible skyrocketing in the price of money.
This follows a move by members of parliament to adopt the president’s recommendation in the Finance Bill 2019 to scrap the interest rates cap law, which came into force three years.
“The regime of the 20% interest rate is long gone. The macroeconomic and business environment where we are today does not at all support an environment of high rates,” said KCB Group Mr Joshua Oigara, who is also the Chairman of the Kenya Bankers Association.
Mr Oigara said allowing banks to price the risk of borrowers is important and the banking industry has over the last two years learnt a number of lessons in that regard.
“As an industry, we are in a new equilibrium. Banks have reached a new business model. We lend to current customers at 13% because we have accepted their risk profile as an industry. That will not change the next day. So the fear that there will be a massive repricing the next day is not true,” said Oigara.
The net effect of the capping has been a credit squeeze and a slowdown in lending especially towards Small and Medium Enterprises, whose risk profile is perceived to be higher than that of bigger and more established businesses.
But on the list of winners after removal of the rate cap law are Savings and Credit Co-operative Societies, especially those engaged in the deposit-taking business and therefore operate as quasi-commercial banks.
“The rate cap law had the effect of pushing our members towards the banks. But now this movement is likely to be reversed especially as SACCOs with deeper pockets buy back more expensive bank loans from their members,” said Moses Chebor, CEO Boresha Sacco Society Limited.
The repeal of the cap has widely been debated by analysts, consumer groups, politicians and even in the media; creating fears that banks will reprice loans upwards.
“Removal of the rate cap law puts us back to the rightful position in the credit market where we serve the most low-income segments of the population,” said Charles Ngutu, a director at Taraji Sacco Society Limited.
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