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Accountants group endorses Bill capping interest rates

Thursday August 11 2016

Patrick Ngumi (left), the chief executive officer of the Institute of Certified Public Accountants of Kenya (ICPAK) and vice-chairman Julius Mwatu at a past press briefing.

Patrick Ngumi (left), the chief executive officer of the Institute of Certified Public Accountants of Kenya (ICPAK) and vice-chairman Julius Mwatu at a past press briefing. ICPAK says the banking sector has operated on “an oligopolistic market mode where credit pricing is not reflective of market fundamentals.” FILE PHOTO | WACHIRA MWANGI | NATION MEDIA GROUP 

By BRIAN NGUGI
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The Institute of Certified Public Accountants of Kenya (ICPAK) has endorsed a Bill seeking to cap interest rates, saying if adopted it would provide a mechanism for regulation to benefit borrowers.

“Ceilings if well implemented can be a good way of protecting consumers from high interest rates, making loans affordable,” Julius Mwatu, ICPAK national vice chairman said in a statement Wednesday.

The Bill is currently before President Uhuru Kenyatta, who is expected to either reject it or sign it into law.

The proposed law is intended to regulate interest rates applicable to bank loans and deposits. It also prescribes penalties for bank officials who violate the requirement.

The 2015 Banking Amendment Bill caps bank interest rates at four per cent above the indicative Central Bank Rate (CBR).

Bankers have urged President Kenyatta to reject the Bill, arguing that it will hit small borrowers the hardest.

If Mr Kenyatta signs the Bill into law, the bank lending rates will be capped at 14.5 per cent (based on the current CBR of 10.5 per cent), a significant difference from the current average lending rate of 18 per cent.

'OLIGOPOLISTIC MARKET'

ICPAK hit out at those opposing the Bill, saying the banking sector in Kenya has operated on “an oligopolistic market mode where credit pricing is not reflective of market fundamentals.”

The accountants' body also dismissed a claim by bankers that the proposed law will distort the market.

“It has been argued that prices charged for access to credit can be unpredictable and anticompetitive; and therefore higher than the true cost of lending. Setting [a] lower cap on interest would provide a conducive environment for lenders to operate,” ICPAK said.

The group noted that interest rate ceilings will prevent “naïve and ignorant borrowers” from agreeing to loan terms to which they eventually default.

“An interest rate ceiling is a good way to limit access to credit to some impaired and low-income consumers, because they help avoid social harm,” it said.

It further pointed out a number of countries that have embraced similar legislation for interest rates with great benefit.

“Argentina, France, Zambia, Canada, Germany and a host of countries within the European Union have successfully resorted to such measures in order to protect their citizenry from exploitation. Contrary to the sentiments expressed against this policy reform, the banking sectors of [a] majority of these countries are considerably more vibrant and efficient,” ICPAK said.