MPs leave Kenyans at the mercy of banks as rate caps fall

Members of Parliament (MPs) have left Kenyans at the mercy of banks on the rate charged on new loans as the interest rate caps fall.

In a chaotic vote taken Tuesday afternoon, the majority of MPs walked out on house sittings to leave a depleted minority, effectively failing to overturn the recommendations by President Uhuru Kenyatta on the repeal of the rate cap.

To retain the rate cap, the Presidential proposal required the opposition of a minimum 233 members but by voting time, only 161 MPs were present therefore the House could not even debate on the matter.

Consequently, the President’s memo recommending the scrapping on the interest cap law automatically sailed through.

Upon the signing of the Finance Bill by President Kenyatta, new interest rates charged on loans will be left to the discretion of banks.

Nevertheless, MPs have taken up the recommendations of the National Assembly Finance Committee to hold existing loans at the prevailing rate of four percent above the Central Bank Rate (CBR) much to the relief of current loan holders.

The lack of an oppositional front to the rate cap repeal in Parliament deals a blow to proponents of the stay of ceilings to lending who saw the holds a measure to contain the previously exploitative rates while unlocking private sector credit flow.

While the stay of the rate cap has had its unwanted outcomes including a severe credit squeeze in the wake of increased domestic borrowing by the government, rate cap mastermind and Kiambu Town MP Jude Njomo had anchored the extension of the ceiling on the diversion of government lending away from the local market to free up liquidity.

Earlier in the day, Mr. Njomo stood his ground on the possibility of a repeal saying he would still have his sight firmly set on bank behaviour in a post rate environment.

“In the very unlikely event the Presidential memo stands, I can promise banks that we will revisit,” he said.

Fellow legislator Moses Kuria however backed the lift of caps noting the constrained effectiveness of monetary policy in impacting the economy.

Mr. Kuria’s resolve was anchored in President Kenyatta’s October 4 memo to MPs which underscored the mushrooming of shylocks and unregulated lenders and the general decline of economic growth from the locking out of small and medium enterprises (SMEs) from the formal credit market as grounds for removal of the rate capping law.

The lifting of interest rate caps however appears to hardly matter to the repeatedly mentioned SMEs who historically have sat out of the formal banking channels.

“I have chosen to move on. Rate cap or not, SMEs are majorly financed through chamas, Sacco’s, family and friends. Even with the rate cap gone, banks would still exercise caution in lending particularly with the recent implementation of tighter accounting standards,” Viffa SME Consult Managing Director Victor Agolla told Citizen Digital in an earlier interview.

What next?

The perceived fear among both members of the public and legislators is the return to the chaotic pre-capping regime which saw the charging of exploitative interest rates which touched a near high of 30 percent in some cases.

The only assurances offered on the prudent charge of new loans have incidentally and ironically risen from the once rogue banking sector which now promises to behave.

Under the stewardship of the Central Bank of Kenya (CBK), the coalition of lenders adopted to the Banking Sector Charter of 2018 in March this year in a commitment towards fostering transparency in loan issuance.

“It’s true we are going a long-way in resolving this matter but we need to do the right thing. We have done quite a lot in effect to deal with the fundamental question that led to the introduction of the rate cap. Maybe it was the way to bring the sector together,” CBK Governor Patrick Njoroge told a news conference on May 28.

While the bankers have put out progressive tenets including fairness and building financial literacy and access, some sections of the Charter are yet to be fully exercised putting into doubt the suggestion of a ‘born again’ financial sector.

Banks are backing the recent innovation of SME centered products to include the lowly-priced Stawi to ensure the servicing of the lowly credit valued economic segment.

Altogether, the public eyes will be fixed on commercial banks to see whether they walk the talk on their promise to better serve the general economy.

According to data from the Kenya Bankers Association (KBA), banks now carry a weighted base of Ksh.4.6 trillion and Ksh.3.4 trillion in loans and customer deposits respectively as of May 2019.