The Banking (Amendment) Bill, 2015 was signed by President Uhuru Kenya. It will be used to cap bank lending interest rates. The banks hands will be tied in terms of how much they should charge on loans and pay depositors.
Currently, the Central Bank Rate (CBR) stands at 10.5% meaning that the banks cannot charge over 14.5% on loans to be issued. The new law brings a sigh of relief to the bank depositors’ faces since they are assured of getting at least 70% of the CBR on their deposits.
The banks had vehemently opposed the proposed law because the law will negatively affect their profits.
The new law is expected to discourage the activities of exploitative Savings Credit Cooperative Societies (SACCOs) and Shylocks. The current lending rates range from an average of 18% to a maximum of 24% per year.
What people said about the law?
“I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, specifically banks. These frustrations are centered around the cost of credit and the applicable interest rates on their hard-earned deposits. I share these concerns.” – Honorable Uhuru Kenyatta, The President of Kenya
“High interest rates…have forced some investors to relocate to the neighboring countries with better rates.”
– Honorable Raila Odinga, Official Opposition Chief
“Indeed the banking sector has not been fair to the Kenyan people.”
– Kimani Ichung’wa, Kikuyu Member of Parliament
“When interest rates are capped, banks will only lend to people with low risks.”
– The Kenya Bankers Association
It is interesting to note that Bloomberg reported that Dr. Patrick Njoroge, Governor of Kenya’s Central Bank opposed the capping of banking interest rates.
In their past research, World Bank feels that Interest rates caps are popular but their effectiveness has not yet been proven. That notwithstanding, Kenya has taken a flexible approach the whole issue of capping bank interest rates. The cap set will respond to the available market conditions. When there is monetary tightening it will rise and in the case of easing it will fall.
Implementation in other countries
The capping of interest rates is implemented in several countries across the globe. Examples are:
- South Africa
- Nicaragua and
We are now waiting with our fingers closed to see how the whole thing turns out. The responses may be varied from what has happed in other countries around the world.
Past Results from Interest Rates Capping
- Decreased number of new banks or financial institutions seeking licensing
- Credit market inefficiencies
- credit rationing
- may lead to rise of informal lending channels
- undermining of the true use of monetary policy
- Financial institutions may close down some branches hence cause a reduce access to credit, this happened in Nicaragua.
- Banks may increase other costs of accessing credit (other than interest rates)