The Central Bank of Kenya wants Parliament to give it time to compel banks to lower their lending rates instead of imposing caps through the Central Bank of Kenya (Amendment) Bill 2015.
The regulator last week published the lending rates of each commercial bank, which showed that lenders were charging up to three times the reference rate set by the CBK.
CBK Governor Patrick Njoroge said that given time, the market will force banks to re-price their loans or lose their dominance.
“Right now the banks are under a lot of pressure from the population, from you (MPs) and from us as the regulator. They have large margins but they will adjust or lose their positions,” Dr Njoroge said on Tuesday. MPs, through a legislative proposal filed by Sirisia MP John Waluke, want to cap interest rates to five per cent above the Central Bank Rate, which was retained at 11.5 per cent in the January monetary policy meeting.
The MPs say banks have been ignoring indications from CBK including the Kenya Bankers Reference Rate, the benchmark for pricing loans which was retained at 9.87 per cent.
However, Dr Njoroge said interest rate controls would be “harmful and ineffective” and only promote the emergence of a parallel market.
“It will encourage an informal system where banks will abandon risky loans and loan sharks will emerge and prey on the weakest,” the governor told the National Assembly committee on Finance on Tuesday. He said banks could start rationing credit, which will deny the small and medium enterprises crucial funds to spur economic growth.
Dr Njoroge said lenders will still be able to avoid the caps by hiding charges and fees, which will make their pricing even more opaque. “I strongly urge you to reconsider, we are just beginning to use soft power to tighten responsibility,” he said. The regulator said capping interest rates will have a negative effect through the whole economy affecting non-bank sectors.
Meanwhile, CBK will push to provide huge depositors at the troubled Imperial Bank Ltd with access to their funds by the end of next month, despite efforts by shareholders to stop it.
Dr Njoroge told the committee that detailed examination of loans and deposits of more than Sh1 million will be completed by March 31 to allow genuine ones access their funds.
“We are looking at the details whether Know Your Customer was done, whether the loans have security and not just on paper and hopefully we will complete by March,” he said.