President Uhuru Kenyatta has rejected the 2019/20 budget demanding that lawmakers remove a cap on commercial lending rates.
In 2016, the government limited rates banks can charge customers to four percentage points above the central bank’s benchmark – currently 9% – saying they were concerned about high rates.
President Kenyatta is in agreement with the Treasury and the Central Bank of Kenya that the interest rate cap is hurting the economy.
Their argument is that the cap has cut private-sector loan growth because banks have avoided lending to customers deemed as risky, including small and medium-sized businesses as well as individuals who borrow for consumption.
Should MPs now agree with him and remove the cap, borrowers will be left at the mercy of banks on the one hand, while on the other, banks will have the freedom to price their loans depending on their risk assessment.
The National Assembly will need to raise a two-thirds majority to overturn Uhuru’s memorandum and retain the cap which was introduced on September 14, 2016.
Should they fail to raise the number, Uhuru’s veto will carry the day removing the cap which has been criticised by bankers and some economists.
The Head of State while giving reasons why the interest cap rate should be done away with saying that it has led to a reduction of credit to the private sector, particularly Micro, Small and Medium Enterprises.
“Most commercial banks adjusted their lending business models towards large corporates and the public sector and away from small-scale borrowers and individuals,” President Kenyatta said.
He added that a study by Central Bank of Kenya showed that rationing out MSMEs from the credit market by commercial banks is estimated to have lowered the country’s economic growth by 0.4 per cent in 2017 and by a further 0.2 per cent in 2018.
President Kenyatta also noted that the interest cap had led to the weakening of the effectiveness of monetary policy, with evidence of perverse outcomes making CBK less effective in dealing with economic shocks and delivering on its mandate.
“Studies indicate that the lending activity of smaller banks reduced with an outstanding stock of credit declining by about 5 per cent in the 12 months ending September 2017,” Kenyatta listed his fourth reason why the cap needs to be scrapped.
He added; “Small banks have been disproportionately hit by capping due to their different business model of relying more on higher-risk/higher-return borrowers such as MSMEs.”
The President also noted that the cap had led to the mushrooming of shylocks and other unregulated lenders in the financial sector.
He noted that the government and the banks have since the introduction of the cap initiated and implemented programmes and measures aimed at supporting greater access to affordable credit to the vulnerable sectors.
“The Government is also working with development partners who appreciate the shortcomings associated with the capping of the interest rates and are willing to support the Government in enhancing the targeted programmes,” the Head of State said.