2019 review: Interest caps fall at second attempt

In a seemingly last ditch attempt to salvage the economy off interest cap hurdles, the National Treasury through the then Cabinet Secretary Henry Rotich made a second attempt at freeing the lending rates under amendments to the Finance Bill in June.

The proposal was once again backed by the need to rekindle thinning private sector credit growth and funding to Small and Medium Enterprises (SMEs).

Further, the Central Bank of Kenya (CBK) would again flank the lobby to Parliament denoting its own reasons of monetary policy limitation in the three years of the caps stay.

Nevertheless, Members of Parliament would once again give the cold shoulder to the proposal to keep commercial lending rates capped at four percent above the Central Bank Rate (CBR) for another year running.

However, President Uhuru Kenyatta would have the last laugh by refusing to assent to the 2019, Finance Bill to send the piece of legislation back to Parliament for the further considerations to the interest rate capping regime.

No opposition

In his memo to MPs, read to the house on October 17, President Kenyatta noted down unintended effects of the rate caps stay including the choking of private sector credit growth and severed monetary policy transmission, terming the effects as significant and damaging to the economy.

Moreover, the President faulted the caps for the mushrooming and subsequent thriving of shylocks and other unregulated lenders.

Already, a prior CBK study had already rated the impact of the credit constrains at 0.4 and 0.2 percentage points on Gross Domestic Product (GDP) across 2017 and 2018 respectively.

Implemented on the month of September in 2016, the interest rate caps would fall on November 5 in a chaotic vote which saw opposing MPs fail to raise the required threshold of 233 members to see the proposals in October’s Presidential memo stand.

Interest rate charged on existing loans were however retained as they were prior to the vote following the adoption of amendments by the house’s finance committee.

Bemused by the turn of events, the interest rate caps proposer in Kiambu Town’s MP Jude Njomo promised to revisit the outturn.

A review to the repeal of the interest rate capping law is however only possible in June at the earliest.

Assurance

Banks have in the aftermath of the interest rate capping law involved themselves in offering assurances to a change financial services sector following fears on the return of exorbitant interest rates.

The majority of lenders have already issued new rates of no more than 16 percent on new loans backing the pronouncement on the adaptation to new banking models including risk based pricing.

Barclay’s Head of Treasuries for East Africa, Anthony Mulisa for instance argues- gone are the days of bulking all borrowers into one basket.

“Every borrower will now be paired against their credit risk as per their risk rating registered by Credit Rating Bureaus (CRBs),” he said.

The assurance by banks has been backed by the tough talking CBK governor Patrick Njoroge who has warned banks against soiling their newly found flexibility with exploitative credit terms.

The reserve bank has for instance urged banking shareholders to be more accepting of lower return in a means to rein in on excessive interest rates.

“This is not a beauty pageant where you line up banks by their profit margin as this would only be a race to the bottom,” Dr. Njoroge told a post Monetary Policy Committee (MPC) news conference on November 26.

Already, the CBK requires banks to continue submitting the monthly capped interest rate return on loans outstanding before the enactment of the 2019, Finance Act.

Furthermore, the lenders are obligated to keep monthly returns on interest rates for loans post-interest rate capping and customer complaints with the first submission of record falling on January 10, 2020.

Yield curve

In spite of the numerous assurances, excessive domestic borrowing by government threatens to drown the newly found optimism for better private sector credit flows in the New Year.

The recently adopted Supplementary Budget has already pushed domestic borrowing targets by Ksh.91 billion to Ksh.391 billion as per the latest National Treasury disclosures elevating the risk for higher interest rates on T-Bills as the Treasuries come under competition from new private sector demand.

While the CBK has lowered its CBR by 50 points to 8.5 percent to spur cheaper credit in the market, Mulisa reckons the review maybe a zero sum game in the face of a rising yield curve.

“Banks usually take on deposits at a rate determined by T-Bills. If this goes up, cost of funds are due to rise, eroding gains made from the lowering of the CBR,” he added.

Viffa Consult Managing Director Victor Agolla meanwhile expects tighter financial reporting rules to tie up free credit flows to SMEs in the post rate cap environment to cast further doubt to lending.

“With accounting provisions such as IFRS 9, banks are cautious of lending on to risky borrowers. Moreover, banks have no moral obligation to fund SMEs,” he said.

Additionally, Mulisa denotes banks may shy away from advancing credit to the more risky borrowers in fear of being stigmatized for passing on higher interest rates to keep within a band of moderately prized borrowers.

Already, Sidian Bank has been subjected to online ridicule for jumping the gun with the pronouncement of higher interest rates in November, rates which it has subsequently dropped.