Banking Amendment Bill Finally Lands In The National Assembly

The Banking Amendment Bill has finally been tabled in the National Assembly as it seeks to seal the loopholes in the wordings of the Banking (Amendment) Act of 2015.

In March 2019, the High Court suspended the Banking (Amendment) Act 2015 in a ruling that declared Section 33B (1) and (2) of the Banking Act unconstitutional.

The Court gave the National Assembly one year to amend the anomalies, failure to which will mean a reversion to a free-floating interest rate regime.

A three-Judge bench determined that the wordings the Parliament used to define the terms ‘credit facility’ and the ‘Central Bank Rate’ are vague and open to multiple interpretations.

The anomalies and ambiguity arise in Section 33B (1) of the Banking Act which states that, “a bank or a financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than four percent, the Central Bank Rate set and published by the Central Bank of Kenya (now at 9.0%)”.

The judges noted that the words “at no more than four percent, the Central Bank Rate” are vague since it is not clear if it is above or below CBR.

In September 2018, the National Assembly blocked a section of the Finance Bill 2018 that sought to repeal the cap on lending rates, and instead, the floor cap on deposit rates was scrapped off.

Because of rate caps, banks have shied away from lending to the SME sector, leaving them with no options except to approach shylocks and digital lenders, who charge exploitative rates.

A proposition to repeal the law was also included in the Finance Bill 2019, where “we expected a possible review, in the form of a change in the benchmark from the Central Bank Rate (CBR), to probably the Kenya Bank Reference Rate (KBRR), and an increase in the margin from the current 4.0.”

As of April 2019, the private sector credit growth rate stood at 4.9 percent according to the MPC market perception survey. With the repeal of the rate cap law, analysts expect that access to credit by Micro, Small and Medium Enterprises (MSMEs) will increase as banks will have sufficient margin to compensate for risks.

Credit and economic growth are positively correlated and economists expect that with increased access to credit by MSMEs, the economy is bound to expand as MSMEs make a significant contribution to the economy. According to data from the KNBS, Micro, Small and Medium Enterprises (MSMEs) 2016 survey, MSMEs account for approximately 28.4% of Kenya’s GDP.

With the repeal of the rate cap law, the Central Bank of Kenya will be free to adjust the monetary policy rate in response to economic developments such as inflation and growth.

Read Also: Banking sector key to sustained economic growth for Kenya