How new law caught banks flat-footed

Co-op- Bank group managing director Gideon Muriuki, Kenya Bankers Association chief executive officer Habil Olaka and vice-chairman John Gachora address journalists on measures to help reduce interest rates at the KICC in Nairobi on August 10, 2016. PHOTO | NATION MEDIA GROUP

What you need to know:

  • Some members of the bankers’ association wrongly believed the President would put his family’s banking interests first.
  • It also appeared to them that a free market champion could not support the capping of interest rates.
  • The banks also believed that as a champion of free market economy, the President would not give in to pressure by MPs to fix interest rates.
  • CBK Governor Dr Njoroge wrote a series of commentaries in national dailies urging commercial banks to show “credible commitment” in bringing down lending interest rates.
  • The banks ganged up against the Bill and held late night secret meetings with some MPs and powerful government officials.

Commercial banks were shocked when President Kenyatta signed into law a Bill capping interest rates, Nation can reveal.

Top government sources on Sunday revealed that banks were “overconfident” that the President, because of his family interests in the sector, would reject the Bill which will most likely affect the banks’ profit margins.

Believing circumstances were on their side, the source explained that this was the reason why, five days after the President had received the Banking (Amendment) Bill, the banks had not submitted a detailed map of how they would lower interest rates and change their ways of making “super profits” even when other sectors are struggling.

“The banks were working under the illusion that since the President’s family is a shareholder in a major bank, he could not sign into law a Bill seeking to cap interest rates. What they didn’t know was that for him, public interest comes before individual interests,” said the source.

The banks, which had the tacit support of National Treasury CS Henry Rotich and Central Bank Governor Patrick Njoroge, also believed that as a champion of free market economy, the President would not give in to pressure by MPs to fix interest rates.

“They had also these facts but the President could not accept to be pressured into rejecting the Bill when the banks had not offered a viable map for lower interest rates in future. He could not trust them on the basis of a memorandum of understanding,” another source, who requested anonymity, said.

These were some of the intriguing events that saw the President take the decision, which some say could shape his legacy and that has divided experts but elicited joy among Kenyan borrowers.

In the first week of August, Dr Njoroge wrote a series of commentaries in national dailies urging commercial banks to show “credible commitment” in bringing down lending interest rates.

PUBLIC OUTCRY

Writing in the wake of public outcry over high credit costs charged by banks and a looming legal bid to cap the rates, he argued that Kenyan banks needed to lower their “remarkably high” interest rates and make a “credible down payment” to borrowers.

Back at State House, pressure was mounting on President Kenyatta, who was due to receive the controversial Bill passed a week earlier by the National Assembly to control lending rates.

State and banking industry officials revealed that a hard-line stance adopted by the banking industry through the Kenya Bankers Association (KBA) was the straw that broke the camel’s back.

The banks ganged up against the Bill and held late night secret meetings with some MPs and powerful government officials.

Mr Rotich and Dr Njoroge had publicly argued that price caps was not the ideal way to control rates. Last week, they watched as President Kenyatta assented to the Bill.

“When the Central Bank governor asked the bankers to put up a down payment, he was very serious. And that was the position of the government that led the CBK governor to try to win over the banks using moral persuasion. If the banks played ball, it would have made life easier to issue a memorandum and make qualifications to the Bill.

“But it was impossible in an environment where the banks did not play ball at all, and they were contemptuous of the legislative process and the role of the national government,” said an official familiar with the matter.

Sources said that the banks failed to submit a viable option that could have seen interest rates come down and did not commit to any timelines in the belief that the President could not assent to the law.

LOWER INTEREST RATES

“The banks did not come to the table with a credible option to lower interest rates, neither did they agree on specific time-bound action plan. They just didn’t expect the President to sign the Bill into law. There is no way you can send a memorandum back to the National Assembly when the industry in question has done nothing to endear itself,” said a source.

On Saturday, KBA chief executive Habil Olaka argued they had presented a seven-point plan MoU among all lenders.

He said the MoU had addressed the “bankers need to respond to the needs of consumers in terms of the rates coming down.”

In the plan, he said the banks had, for instance, committed to boost lending by allocating Sh30 billion to small and medium-sized enterprises (SMEs) at concessionary rates that did not exceed 14.5 per cent, with Sh100 billion given to women and young entrepreneurs.

But Treasury officials told Nation the banks’ initiative did not address the industry-wide concerns by consumers. They noted that instead of providing solutions, the bankers chose to play “hard ball.”

“If the banks had made a gesture showing how they would work within the normal market forces, they would have pre-empted any need for this thing to go in the direction it has gone,” said an official familiar with the last-minute thinking that saw the President sign the law.

President Kenyatta said he had “consulted widely” before assenting to the amendments passed by the National Assembly last month.

In a carefully crafted speech, he also alluded to the frustration in dealing with banks as cited above by the officials.

“Since receiving this Bill, I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks,” he said. He added that the frustrations suffered by ordinary citizens were tied to the high cost of credit and low returns on savings.