Kenya’s Parliament last week passed a Bill aimed at capping bank interest rates at four per cent above Central Bank Rate. The MPs also went ahead to endorse jail terms for CEOs and directors of banks who wouldn’t adhere to this regulations if its signed into law by the President.
The move has elicited mixed reactions from different stakeholders, the Kenya Bankers association has opposed the move while the Central Bank of Kenya is also against the move but agrees with the general public sentiment that cost of credit in Kenya is expensive. The Consumers Federation of Kenya on the other endorsed the move arguing that the Bill will ensure consumers get value for their money so that they are not exploited.
READ; Kenyan Banks with the Most/Least Favorable Lending Rates as at June 2016…
In a report posted few months ago, the Institute of Certified Public Accountants of Kenya (ICPAK) has recommended that interest rates should be regulated.The institute argues that Kenya is a classic case of a ‘free market failure’.
The institute says that interest across the US, UK, and EU are not capped but banks behave as if they are capped and they never surpass 2 percent above the base rate. ICPAK also noted that the proposal to cap interest rates was in the Original Donde Bill (which also introduced Monetary Policy Committee (MPC)). The Bill had suggested interest rate cap of 4 percent above the base rate and that 70% of the base rate be paid to savers — this means that at the current rates, depositors would earn an interest of 7.3% on their cash.
READ; Central Bank says Bill to Regulate interest rates will have adverse consequences
The report says that interest rates were regulated in Kenya between 1906 until 1992 i.e 86 years. During this time, banks made reasonable profits and most of them prospered. From 1993 the banks started making Abnormal profits.
“In economics Abnormal profits is defined as unfair profits derived from privileged position. This is different from windfall profit which comes from an act of God e.g sudden change of trading conditions or change of weather destroying a competitors crop in case of farming.” ICPAK
“The powerful forces are at work again and as of today the Finance Bill which was to be ammended include the Rate capping has not been passed. In Kenya it is necessary to cap the Interest rates since the banks cannot self regulate themselves” ICPAK
The Chart Below shows the Overall lending rates by Kenyan commercial Banks; (click to enlarge)
