President Uhuru hints at interest cap law review as private sector lending slows down

President Uhuru hints at interest cap law review as private sector lending slows down

The government has given the first indication that it is likely to review the Banking Act in a bid to spur lending in the economy.

This after the head of state in his state of the nation addressed noted with concern that the law had led to the slowdown in access to credit by small and medium sized enterprises.

President Uhuru Kenyatta on Wednesday said the law had had an unintended impact from the envisioned move of lowering the cost of credit in the country.

According to President Kenyatta, the government is looking to make changes that will stimulate issuance of credit to sector that drive economic growth.

“It is unfortunate that the unintended consequence of capping of interest rates was a slowdown in lending by our commercial banks. This is an issue that concerns us and is one that I am actively seeking to resolve so that credit can start to flow to the real drivers of our economy,” President Kenyatta said.

The president last year signed into law the interest rate cap that took effect in September.

The law caps interest rates at four percent of the central bank rate (CBR) while interest on deposits is capped at 70 percent of the CBR.

When signing the law into effect in August 2016, the president had indicated that there could be challenges presented.

“We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms,” he said on August 24, 2016.

The statement by President Kenyatta supports a position held by the Central Bank of Kenya that the law could not remain in place as is.

“It’s clear we have deviated from our normal course and we need to return to market determination,” CBK governor Dr Patrick Njoroge said.

The central bank has however maintained that it’s still too early to give conclusive evidence on the impact of the law, adding it was still collecting data from the industry.

Banks have been forced to change their lending habits as evidenced in the 2016 results being released.

While announcing a four percent dip in profitability, Equity Bank chief executive officer James Mwangi questioned why the law had not been reviewed, given the impact it had on slowing loan issuance.

Mr Mwangi was particularly perplexed at how government securities remained more attractive, despite being more expensive than commercial loans.

“All infrastructure bonds are above 14. All infrastructure bonds are above 14. Risk free is higher than the lending rate. The government is borrowing at a higher rate than it wants the private sector to borrow at,” Mr Mwangi posed.

He gave the example of East African Breweries Limited (EABL) going to market for Sh6 billion offering investors a 14.17 percent rate of return.

“EABL is willing to borrow higher than the capped interest rate. I don’t know how much I can belabor this point, for everyone to recognize the market mechanism is not operational in Kenya,” Mr Mwangi stressed.