Banking Interest Caps Here To Stay – Parliamentary Committee

A proposal by National Treasury to have the interest rate capping law repealed has been opposed by a parliamentary committee.

The Finance Bill 2019 which proposes the amendment of section 33 (b) of the banking Act is currently before the National Assembly.

The proposal was tabled before the national assembly by acting National Treasury CS Ukur Yattani, his Principal Secretary Dr. Julius Muia and officers from Kenya Revenue Authority (KRA).

The Finance and National Planning Committee of the National Assembly argued that the interest rate cap will subject Kenyans to expensive credits at the expense of commercial banks.

According to Treasury CS Mr. Yattani, the capping of interest caps had denied Small and Medium-sized Enterprises (SMEs) the opportunity to acquire loans from commercial banks as the banks prefer to loan government entities because it is less risky.

“The issue of capping the interest rate has not worked and this has had serious effects on the credit to SMEs. It is time to review this. The interest cap must be removed,” he said.

The CS further explained that when the interest caps were introduced, lending to the government was increased as credit increased by 2.3 percent up from 19.9 percent while for the private sector, credit reduced by four percent, making it 72.8 percent.

The Parliamentary committee members, led by its chair Joseph Limo, MP for Kipkelion East strongly opposed the proposal saying that they will not have the people they represent subjected to exaggerated credit rates to benefit commercial banks.

Samuel Atandi, MP for Alego Usonga said that the banks have failed to convince the committee to have caps removed before and that the removal of interest caps will only benefit a few shareholders as banks decide who to give credit to.

“The government should stop borrowing from local banks because that makes the cost of credit high to the SMEs. KRA should be involved actively in collecting taxes so that the taxes are used for the country’s budget,” said Mr. Atandi.

Mr. Limo on his part was of the opinion that segmenting the rates into high and low risks and applying the rates appropriately but progressively would be a better way to approach the issue, as he acknowledges that the caps exist to cushion the low cadre borrowers.