New Banking Act doesn’t offend any laws or economic principles

What you need to know:

  • President Uhuru Kenyatta should be applauded for assenting to the Bill despite the recommendations of officials of the Central Bank of Kenya and the National Treasury to veto it.
  • The right of Kenyans to access credit springs from the self-interest of banks to earn interest rather than their benevolence and altruism to save us from shylocks and micro-lenders.

The issue of bank interest rates and the corresponding matter of how much money the financial services sector should make out of the economy is both controversial and politically divisive across the world.

Since 1980, when Ronald Reagan was elected as president of the United States, the ideology of free market capitalism has made it a mortal sin for political representatives in Third World states to regulate the financial services sector. Viewed this way, Kenyan MPs should be commended for their moral courage in passing the Banking (Amendment), Bill 2015 to cap interest rates.

Similarly, President Uhuru Kenyatta should be applauded for assenting to the Bill despite the recommendations of officials of the Central Bank of Kenya and the National Treasury to veto it.

There is no denying that the high political stakes in this matter were a major factor in the President’s decision. The significance of the President’s decision to side with the people is underscored by the fact that most economists and business pundits were in favour of the rejection of the Bill on the basic premise that it goes against free market policies in a capitalist economy.

In my view, the President should rest assured that even if the assent was partly informed by his political instincts, his pro-people decision does not offend any economic law or principle in a humane capitalist society.

The business of bankers is to lend money at a profit. Therefore, the right of Kenyans to access credit springs from the self-interest of banks to earn interest rather than their benevolence and altruism to save us from shylocks and micro-lenders.

However, the proliferation of shylocks and micro-lenders is itself a result of the fact that bankers behave as if lending money to ordinary Kenyans is a favour as opposed to a mutually beneficial commercial transaction.

It is unfortunate that the National Treasury, the Central Bank, and most economic pundits are questioning the sovereign right of the National Assembly to regulate interest rates. The condescension and arrogance are revolting, to put it mildly, because there is no economic law or principle that determines the rate of interest in any given economy.

In fact, it is discretion and political choice that determine interest rates. Therefore, leaving the issue of interest rates to the market is itself a political decision.

ESCAPED WAVE OF DEREGULATION

Reagan’s deregulation triumphs were not absolute because during his second term, the US Congress impeded deregulation of the maritime, trucking, and construction sectors, although banks escaped the wave of deregulation until the market crash of 2008.

The point here is that whenever necessary, the US Congress has regulated any sector when it deems it appropriate.

The way I see it is that with the assent of the Bill, the President should now direct the National Treasury and CBK to implement it faithfully and fearlessly, as the Constitution demands of them.

If it turns out, after a year or two, that capping interest rates is a mistake, the MPs will simply repeal the law in the hope that our economists will have developed superior methods of protecting borrowers from exploitative interest rates.

In the end, what is scandalous and unacceptable is the notion that after we have all agreed that banks are making usurious profit at the expense of the national economy and to the detriment of the long-term interest of Kenyans, we should elect to do nothing about it. The President is right in choosing to do something about a serious national problem.

Banking is a business like any other in Kenya’s free market economy. No bank is obliged to continue operating if its owners are convinced that lending at 15 to 17 per cent is not profitable enough.

The President should feel free to tell bank owners that anyone who cannot live with normal profits and do business in accordance with good or bad laws passed by Parliament is free to leave the stage to those willing to do so.

I can bet there is no bank that is about to abandon a country that permits it to lend at 14 to 17 per cent.

The writer is a constitutional lawyer. [email protected].