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President Assents to Bill Capping Bank Interest Rates

BY David Indeje · August 24, 2016 12:08 pm

President Uhuru Kenyatta has assented to the Banking (Amendment) Bill, 2015 capping bank interest rates at 4% below the Central Bank Rate.

“…I have assented to the Bill as presented to me. 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,” said the President in a statement.

According to the statement, “Since receiving this Bill, 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, particularly banks. These frustrations are centred around the cost of credit and the applicable interest rates on their hard-earned deposits. I share these concerns.”

The president further said, “We will closely monitor these difficulties, particularly as they relate to the most vulnerable segments of our population. Whilst doing so, my Government will also accelerate other reform measures necessary to reduce the cost of credit and thereby create the opportunities that will move our economy to greater prosperity.”

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On July 28, 2016, the National Assembly passed the Banking (Amendment) Bill, 2015. The Bill intends to regulate interest rates that are applicable to banks’ loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits.

This is the third time that the National Assembly is attempting to reduce interest rates to affordable levels. In the previous two instances, dialogue and promises of change prevailed and banks avoided the introduction of these caps. In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates.

Read: Central Bank of Kenya opposes capping interest rates

The President further noted that, despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.

The Kenya Bankers Association, (KBA) in a statement said ‘The banks will comply with the law as they continue to provide financial services to their customers’, but cautioned on the move.

“We however do not feel that an arbitrary rate cap is in the best interests of the majority of people and businesses that this law seeks to support.”

“The reality is that there is little evidence from other countries that such interventions have helped the majority of citizens, and in a number of countries such laws have been reversed to promote financial inclusion. However, we as the banking industry remain committed to addressing the fundamental issues that drive up the cost of credit.”

On Monday, Cytonn Investments said interest rate caps would have a clear negative effect on the Kenyan economy and ultimately to the Kenyan people. They likened it as “Kenya’s Brexit – Popular but Unwise”.

Instead they had urged the President not to assent to it, but should provide fundamental and strong consumer protections for Kenyan public, and support innovative and competing alternatives that will make the banking sector more competitive.

David Indeje is a writer and editor, with interests on how technology is changing journalism, government, Health, and Gender Development stories are his passion. Follow on Twitter @David_IndejeDavid can be reached on: (020) 528 0222 / Email: info@sokodirectory.com

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