Back to Expensive Loans as the Short-lived Interest Capping Law is Declared Unconstitutional

By Soko Directory Team / March 19, 2019



CBK Announces Ksh 35Bn Tap Sale on the Infrastructure Bond

The ruling by a three-Judge High Court Bench in Nairobi declared the Banking (Amendment) Act 2016 to be unconstitutional signaling the comeback of expensive loans soon.

Enacted in 2016, the law stipulates a deposit and loan-pricing framework that provided for:

  • A cap on lending rates at 4 percent above the Central Bank Rate (CBR)
  • A floor on the deposit rates at 70.0 percent of the CBR, which was scrapped in October 2018.

Following the ruling, the cap on lending rates at 4.0 percent above the Central Bank Rate (CBR) will no longer be effective, after the 12-months implementation period.

Noting that the implementation of this rule would come with a lot of disruption to the Financial Services sector, the High Court suspended the effect of the declaration for 12-months, thus allowing Parliament time to reconsider sections that were declared unconstitutional by the High Court.

The ruling follows a series of calls to amend the Act with the most recent being a proposal that was tabled by Mr. Moses Kuria, the Member of Parliament for Gatundu South in January 2019.

The proposal made was to amend the Act to allow credit consumers negotiate for interest rates on loans, depending on their risk profile, with an upper limit of up to 6.0% above the existing interest rate cap levels.

This would have seen borrowers be able to access credit at rates of a maximum of 19.0 percent per annum compared to the current rate of 13.0 percent. The Central Bank of Kenya echoed this sentiment and lauded the members of parliament for acknowledging the negative effect of interest rate cap on the economy.

CBK Governor Dr. Patrick Njoroge has also maintained his stand that the law should be completely overhauled to encompass a system that allows banks to adopt a risk-based lending approach. These efforts have been in a bid to try and improve credit extension to the private sector, comprised largely of the Micro, Small and Medium Enterprises (MSMEs), as private sector credit growth averaged 3.3 percent in 2018, way below the 5-year average of 11.8 percent.

The suspension duration is expected to serve as a transition period to avoid disruption of current contractual agreements between banks and their customers and, on the other hand, allow parliament to assess and amend the provisions in contention.

Section in Contention 

Section 33b of the law on interest cap is what is in contention. Here is an excerpt from the same:

33B. (1) A bank or a financial institution shall set (a) the maximum interest rate chargeable for a credit facility in Kenya at no more than 4%, the base rate set and published by the Central Bank of Kenya.

(2) A person shall not enter into an agreement or arrangement to borrow or lend directly or indirectly at an interest rate in excess of that prescribed by law.

(3) A bank or financial institution which contravenes the provisions of subsection (2) commits an offense and shall, on conviction, be liable to a fine of not less than one million shillings, or in default, the Chief Executive Officer of the bank or financial institution shall be liable to imprisonment for a term not less than one year.

Blow To SME Sector

Proponents of the Interest Capping law thought fixing the interest rates would enable Kenyans, especially the Small Medium Enterprises (SME) have access to affordable loans. They were wrong.

Immediately the Bill was signed into law, commercial banks refrained from lending to individuals as well as SMEs. More than two million accounts were affected as a result. SMEs went into more trouble than before.



About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

View other posts by Soko Directory Team


More Articles From This Author








Other Related Articles










SOKO DIRECTORY & FINANCIAL GUIDE

ARCHIVES

2019
  • January 2019 (256)
  • February 2019 (216)
  • March 2019 (288)
  • April 2019 (204)
  • 2018
  • January 2018 (291)
  • February 2018 (220)
  • March 2018 (279)
  • April 2018 (226)
  • May 2018 (240)
  • June 2018 (178)
  • July 2018 (257)
  • August 2018 (250)
  • September 2018 (256)
  • October 2018 (287)
  • November 2018 (286)
  • December 2018 (187)
  • 2017
  • January 2017 (183)
  • February 2017 (195)
  • March 2017 (207)
  • April 2017 (104)
  • May 2017 (169)
  • June 2017 (206)
  • July 2017 (190)
  • August 2017 (195)
  • September 2017 (186)
  • October 2017 (235)
  • November 2017 (253)
  • December 2017 (266)
  • 2016
  • January 2016 (166)
  • February 2016 (165)
  • March 2016 (190)
  • April 2016 (143)
  • May 2016 (246)
  • June 2016 (183)
  • July 2016 (271)
  • August 2016 (249)
  • September 2016 (234)
  • October 2016 (191)
  • November 2016 (243)
  • December 2016 (153)
  • 2015
  • January 2015 (1)
  • February 2015 (4)
  • March 2015 (166)
  • April 2015 (109)
  • May 2015 (117)
  • June 2015 (121)
  • July 2015 (150)
  • August 2015 (157)
  • September 2015 (189)
  • October 2015 (170)
  • November 2015 (174)
  • December 2015 (208)
  • 2014
  • March 2014 (2)
  • 2013
  • March 2013 (10)
  • June 2013 (1)
  • 2012
  • March 2012 (7)
  • April 2012 (15)
  • May 2012 (1)
  • July 2012 (1)
  • August 2012 (4)
  • October 2012 (2)
  • November 2012 (2)
  • December 2012 (1)
  • 2011
    2010
    2009
    2008
    2007
    2006
    2005
    2004
    2003
    2002
    2001
    2000
    1999
    1998
    1997
    1996
    1995
    1994
    1993
    1992
    1991
    1990
    1989
    1988
    1987
    1986
    1985
    1984
    1983
    1982
    1981
    1980
    1979
    1978
    1977
    1976
    1975
    1974
    1973
    1972
    1971
    1970
    1969
    1968
    1967
    1966
    1965
    1964
    1963
    1962
    1961
    1960
    1959
    1958
    1957
    1956
    1955
    1954
    1953
    1952
    1951
    1950