Mixed reactions from financial experts after Uhuru signs Bill

Mixed reactions greeted a landmark decision by President Uhuru Kenyatta to sign the controversial Banking Amendment Bill that would cap interest rates.

The President defied critics and overruled some of his top advisers, including Treasury CS Henry Rotich and Central Bank of Kenya Governor Patrick Njoroge, who publicly declared their opposition to the law, arguing that it would distort the market.

“Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks on the continent. Banks need to do more to reduce the cost of credit and ensure that benefits of the vibrant financial sector are also felt by their customers,” declared the Head of State as he signed the Bill into law.

Experts said by his surprise decision, the President had ushered in an era of cheap credit for borrowers but declined profits for many banks.

The move immediately struck a cord with a majority of Kenyans, most of whom said they had been locked out of credit either due to prohibitive interest rates or were reeling under the weight of high rates.

Following the signing of the Bill into law, bank lending rates would 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.

Economists say the decision portends a mixed bag for the economy.

The Institute of Certified Public Accountants of Kenya, which is among professional agencies that backed the Bill, yesterday said President Kenyatta “stood on the side of the majority”.

“We are very happy that the President has read the public mood. He has brought sanity to the credit market,” said ICPAK chairman Fernandes Barasa.

ICPAK earlier cited a number of countries that had embraced similar legislation with great benefit.

Economic analyst Marubu Munyaka said the decision to sign the Bill into law was a huge relief “as it will free Kenyans from the burden of costly credit”.

“The President has dismantled the banking cartels which have made Kenya the only nation in the world where banks do not respond to instruments of the Central Bank to control rates. It is a great decision and huge relief for all borrowers,” he said.

However, Mr Armando Morales, the IMF’s resident representative in Kenya told the Nation that the law could steal gains the country had made in the financial industry.

He warned that local banks would shy away from advancing credit to low income borrowers.

However, the IMF officialreiterated President Kenyatta’s “legitimate desire” to see rates go down.

CEO of Rich management Aly Khan Satchu said the new law would not be a magic bullet in lowering the cost of credit.

“It’s a very blunt instrument and it will not have the desired outcome of making lashings of credit available at this capped level. I have already noted that banks have tapered their loans to customers and increased their lending to the GOK. I expect this trend to accelerate,” he said.

Mr Khan said that by the President departing from long established free market credentials, the collateral damage will be felt in Kenya’s  Eurobonds and particularly in bank shares.