Let Us Get Out of the Interest Rate and Move On – Henry Rotich

Financial industry stakeholders on Monday held a forum to discuss the impact of the Banking (Amendment) Act, 2016 amid concerns that the law has slowed down the pace of economic growth.

Since the introduction of the legislation, the number of loan accounts has reduced by more than 1.3 million accounts, while the rate of growth of private sector credit has reached an all-time low with banks opting to invest in Government securities.

The credit markets have suffered further volatility as the level of Non-Performing Loans (NPLs) increased to more than 12 percent (or 292 billion shillings) due to the challenging business environment that was witnessed in 2017 and early this year.

Organized by the Kenya Bankers Association in collaboration with Fanaka TV and the Institute of Economic Affairs, the Interest Rate Debate brought together the private sector, economists, Members of Parliament, consumer rights advocates and the public to discuss ways of moderating the cost of loans in a sustainable way.

“The interest capping law is as a result of massive policy failure,” Said Mr. Moses Kuria, Member of Parliament for Gatundu South.

Mr. Kuria was among the legislators who were against the passing and the implementation of the interest capping law.

According to the Central Bank of Kenya, lending to SMEs has dropped by more than 13 billion shillings due to banks’ heightened risk sensitivity following the enactment of the rate caps in September 2016, as well as provisioning requirements occasioned by the new International Financial Reporting Standards (IFRS) 9 on Financial Instruments.

“Our interest capping law is dragonian. It has both the ceiling and the floor. There is no breathing space. Interest caps in other countries have no ceiling or floor,” said the Treasury Cabinet Secretary Henry Rotich.

Most of those who took part in the debate were of the view that there was the need to relook into the whole interest rate issue and if possible, do away with it all together.

“It is KBA’s view, as well as that of several other industry analysts, the decrease in private sector lending will have a material, long-term impact on the economy,” added Olaka of Kenya Banker’s Association. “All this points to the fact that we must replace this law with measures that meet the needs of all stakeholders. Before the law came into place, the average lending rate was approximately 17 percent and it was even 15 percent a few years ago. We, therefore, believe that rates can come down in a sustainable way that does not limit access to much-needed capital for the core drivers of our growth and employment,” he added.

In the Financial Year 2018/2019 Budget Statement, Cabinet Secretary of National Treasury and Planning Mr. Henry Rotich stated that the Government would put in place a package of reforms aimed at optimizing lending to the private sector while at the same time encouraging innovation in the financial services sector.

In place of the interest rate caps, Mr. Rotich noted several measures including the establishment of a National Credit Guarantee Scheme for Micro, Small and Medium Enterprises (MSMEs), and the introduction of a Financial Markets Conduct Bill, 2018 that comprehensively addresses consumer protection and unregulated lending in the financial sector.

“We should get out of the interest rate cap and move on,” said the Treasury CS.