Banks Will Now Have Their Way in Setting Interest Rates on Loans

After President Uhuru snubbed the signing of the Finance Bill in October and called for MPs to repeal the highly debated interest rate cap, banks will now have their way in setting interest rates on loans.

A majority of MPs walked out on a Parliamentary session on Tuesday, 6th November 2019, leaving only 161 members to vote on the recommendations by President Uhuru on the repeal of the interest rate cap.

At least 233 MPs were required to vote to defeat Uhuru’s recommendations on the interest rate cap, but with only 161 members present, the law was automatically passed.

The interest rate cap was introduced in September 2016, with the aim of extending credit to SMEs and limiting how much banks charged on loans. While all these seemed to be in favour of SMEs, the outcomes of the interest rate cap were quite the opposite.

According to an IMF report, the interest rate controls, since introduction, had reduced the profitability of commercial banks, led to lower credit growth, reduced financial inclusion, weaker tax revenues, and higher financial stability risks.

Now, with parliament having failed to overturn Uhuru’s memo, new interest rates charged on loans will be left to the discretion of banks, something that Kenyans should be worried about.

While the implementation of the law is expected to kick off immediately, MPs have taken up the recommendations of the National Assembly Finance Committee to hold existing loans at the prevailing rate of 4 percent above the Central Bank Rate (CBR), a huge relief to current loan holders.

Banks will now go back to the days where they used to set “exploitative” interest rates on loans to as high as 30 percent in some cases, bringing an unsettling feeling among both members of the public and some MPS.

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