Putting into Perspective the Changes in the Proposed Amendment of the Interest Rate Caps

The Finance and Planning Committee of the National Assembly has proposed a Finance Bill 2018 amendment to address the earlier proposition of a total repeal of Section 33B dealing with interest rate caps on lending and deposit rates by banks, otherwise known as the Banking Act.

Among the proposals, the amendment suggests includes the re-introduction of the Kenya Banks’ Reference Rate (KBRR) framework, which should remain as a baseline for setting the pricing credit, a move that will displace the Central Bank Rate (CBR), the current benchmark.

According to the proposals, banks and other lenders shall set an interest rate chargeable for a credit facility in Kenya at a maximum of 4 percent, the base rate set and published by the KBRR.

Should the proposal be adopted, several changes will be realized. For one, the Central Bank of Kenya (CBK) will have enough room to carry out and monitor monetary policy through the CBR. This will slightly detach CBR and the cost of credit. Nevertheless, one thing remains clear, the constraints on the monetary policy under the proposed framework will still exist.

The move will also reduce the cost of credit as the implied base rate would be 8.3 percent under the new framework. The figure is applicable if the previous KBRR framework is maintained, it is an average of CBR and a 2-month moving average of the 91-day T-bill. Adjusting for the maximum lending rate would be at 12.3 percent.

Also, the consumer lending will reduce due to lower risk premium in comparison to a medium-term or 2-year government paper that accumulates about around 10.9 percent. This is assuming KBRR components remain and its construction is upheld.

The private sector credit growth, which was last reported at 4.3 percent in June 2018 will be subdued. Moreover, the process of enactment of the Financial Markets Conduct Bill will be slowed down. The Bill had initially offered to set aside a reference point for use by the sector and other informal credit providers, among other things.

Some quibbles still remain. There is uncertainty in terms of how the KBRR will be determined alongside the establishment of a deposit rate based on the framework. Putting into perspective all the factors to be considered for the amendment of the bill, a total repeal, which would be the best and the ideal thing to do, is hardly forthcoming.