Gatundu South Member of Parliament Moses Kuria seeks to introduce an amendment to the Banking Act that is likely to make loans more expensive than they are currently.
In an intention to file a motion notice, Kuria is proposing to amend the Banking Act by introducing a risk negotiation window of up to 6 percent above the lending cap for SMEs and unsecured individual customers in what he argues would encourage banks to lend more to risky customers.
If the amendment sails through parliamentary processes in its current form, banks would be allowed to charge borrowers 19.5 percent interest, up from the current 13.5 percent.
According to the latest economic outlook report by Cytonn investments “the low lending rates have seen banks shy away from lending to the private sector and instead turn to the less risky government securities hence reducing the competition for government securities, coupled with the Central Bank of Kenya’s efforts to keep the rates low by rejecting expensive bids.”
Kuria argues the amendment if it goes through would reduce risk owing to competitive loan pricing.
Kuria’s proposal reads in part “introduce a risk negotiation window of up to 6% above the lending cap for SMEs and unsecured individual customers to negotiate pricing based on their risk profile and on a willing buyer, willing seller basis,”.
If this is enacted into law in its current form, it will increase the spread between the benchmark lending rate and the retail interest rate to 10 percent.
This means if the law is in place now, banks would be allowed to charge a maximum of 19.5 percent interest on loans to risky borrowers, up from the 13.5 percent they charge currently.
Even though some tax expert Nikhil Hira agrees that the risk posed by some borrowers has contributed to the credit squeeze, he says Kuria’s proposed six percent risk window is very high.
Nikhil says: “Perfecting the security against a loan by a borrower is not foolproof and with an interest rate cap, banks are not able to price the risk.”
Nikhil says this is because some of the securities such as title deeds presented as security against loans may not be genuine, hence banks have preferred to loan the government, listed companies and multinationals.