Parliament has proposed amendments to the interest rate capping law that could bring the lending rate to 11.6 per cent compared to the current maximum interest of 13 per cent. The present Central Bank Rate (CBR) is nine per cent and banks are restricted to an interest rate increase of four per cent.
Parliament’s Committee on Finance and National Planning has proposed to have the lower band of the rate cap to be removed which means there will be no floor on deposits while the rate cap ceiling will remain. However, it is unclear whether the Committee will use the CBR benchmark or the KBRR according to the Business Daily.
The Kenya Banks Reference Rate’s (KBRR) base rate stands at 7.6 per cent, which if applied will mean that lenders can only charge a maximum of 11.6 per cent. This will in turn give borrowers relief from the pressure the rate cap has created since its introduction.
“Section 33B of the Banking Act is amended by deleting subsection (1) and substituting, therefore, the following new subsection. A bank or financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent above the base rate set and published by the KBRR,” the Committee said in its report.
Parliament Maintains the Rate Cap
The proposed amendments to the rate cap are contrary to the expectations of the banking sector, the International Monetary Fund (IMF), and the government which wanted the law to be repealed.
The Kenya Bankers Association (KBA), for instance, submitted a presentation to the Committee recommending the abolishment of the rate cap as the Treasury Cabinet Secretary Henry Rotich has suggested.
The interest rate capping law that was introduced under the Banking Amendment Act in 2016 has negatively impacted credit accessibility to MSMEs.
“We can demonstrate that the Act introduced a distortion which the credit markets have not been able to recover from. Typically, the market can rebound within three months of a shock, but in this case, the rate caps have prolonged if not exacerbated the declining trend of credit growth,” KBA’s chief executive said in May this year when the Association was releasing a report showing the impact of the law.
Prior to the rate cap law, the Central Bank of Kenya (CBK) had introduced the KBRR that offered a recommended base rate while allowing “banks to factor in their premiums to cover the perceived risk.” However, banks ignored the rate and charged high rates which led to calls for an interest cap according to Standard Digital.
In 2017, CBK suspended the KBRR whose aim was to offer transparency in the credit pricing framework. “In view of the adoption of the new law capping interest rates, the CBK decided to suspend the KBRR framework,” said CBK Governor Dr Njoroge.
The proposed amendments are a victory for borrowers who have been bearing the burden of the high-interest rates imposed by lenders.
