Amendment or Total Repeal: The Interest Capping Law Debate

The debate as to whether the interest rate capping law should be amended or totally repealed is raging on with banks wanting the law dropped for the economy to rise.

President Uhuru Kenyatta also admitted that the rate capping law is unsustainable and that it should be changed for the betterment of the economy.

The genesis of the rate cap debate kicked off in 2016 and was triggered by high-interest spreads (9.5 percent as compared to 6.1 percent SSA peer average).

Predatory lending was evident with commercial banks’ lending at rates as high as 25 percent that led to a public outcry prompting parliament to enact the Bill which later became law.

In September 2016, the interest rate cap law came into effect. In the 1.5 years, the law has been in place, the following effects have been observed according to a report released by Genghis Capital:

• Credit rationing in certain sectors especially SMEs partly due to difficulties to accommodate customers with different risk profiles under the 14 percent pricing. Average loan value increased by 47 percent as per KBA report (2016 – 2017) despite a drop in loan accounts (by 1.2Mn) indicative of lower credit access by small borrowers. Large corporates are still borrowing large amounts.
• Lower profitability across the sector from the drop in net interest income. Sector Profit before tax (PBT) fell by 11.7 percent y/y to June 2017 compared to pre-cap June 2016. 3) Banking business restructuring including; branch consolidations (closure of over 20 branches) and job cuts (over 1,400 employees)
• Focus on non-interest revenue (NIR). Fees and commissions together with trading income compensated the decline in interest income (NIR contribution at 31.8 percent FY17 vs. 28.3 percent in FY16)
• Higher demand for credit due to perceived affordability. The average number of loan applications rose by 238 percent immediately after enactment in September 2016. This has since normalized. 6) Fast tracking of banking sector consolidation. Acquisition of Habib bank by Diamond Trust Bank and Fidelity bank by SBM Holdings.
• The growth of informal and mobile lending channels. In spite of the PSCG falling to about 2%, the counterfactual credit growth average at 16 percent driven by fintech lenders.
• Limited entrepreneurial initiatives across the Micro, Small and Medium Enterprises (MSME) sector.