Accountants oppose scrapping of law capping lending charges

The Central Bank is currently spearheading the process to change the law on lending by collecting views from the public on the negative effects of interest rate caps on the economy. file photo | nmg

What you need to know:

  • The Institute of Certified Public Accountants of Kenya (ICPAK) says move would return the country to era of high interest rates without protecting consumers.
  • ICPAK says while it appreciates the concerns from stakeholders, it is “too early” to accurately determine the impact of capping of interest rates to any sector of the Kenyan economy.
  • The government has promised the IMF a repeal of the interest rate capping law, leaving consumers under a cloud of uncertainty over the future cost of loans.

The push and pull to have the law capping interest rate reviewed has taken a new twist with accountants saying the move would be counterproductive.

The Institute of Certified Public Accountants of Kenya (ICPAK) is now warning that removal of legal limits on borrowing will hurt consumers by returning the country to the era of high credit charges.

The opposition flies in the face of the International Monetary Fund (IMF) and the Central Bank of Kenay (CBK), which see the cap placed on lending rates choking borrowing especially to the private sector.

In fact in reviewing Kenya’s standby facility meant to cushion the shilling from external shocks by the IMF, the deal was to do away with the Act controlling the cost of lending.

And now the accountants’ body says while it appreciates the concerns from stakeholders, it is “too early” to accurately determine the impact of capping of interest rates to any sector of the Kenyan economy.

“As an institute, we continue to support interest rate capping as the benefits outweigh the hiccups faced so far,” ICPAK chairman Julius Mwatu said on Friday.

“We believe that the challenges experienced with lending in the recent past are not directly attributable to the interest rate caps. Therefore, any discussions to consider scrapping of the interest rates caps should ensure that the initial objectives of the capping are maintained.”

CBK governor Patrick Njoroge has ratcheted up pressure for the repeal of the law, saying it is undermining the conduct of monetary policy and having a negative effect on the economy.

Private sector credit grew just 2.1 per cent in the year to February, well below the Central Bank’s target rate of 12-15 per cent.

But Mr Mwatu warned that removing the rate controls without addressing the initial challenge of high cost of credit before the rate cap regime came into place would hurt borrowers.

“We believe that the discussion to lift interest rate caps should be preceded by operationalisation of other mechanisms that will allow a self-regulatory regime such as use of credit rating information,” said Mr Mwatu.

Consumer lobbies have similarly warned that while the subsequent credit crunch after the law was effected in September 2016 bear serious implications to the private sector, scrapping the controls altogether may not be the panacea, and would in fact lead the country back to the era of high rates whose consumer outcry prompted the controls in the first place.

“The reasons, which necessitated the capping regime have not been mitigated upon. CBK must balance market and consumer interests going forward,” said Consumer Federation of Kenya (Cofek) secretary-general Stephen Mutoro earlier.

The law could be repealed by June this year if all goes according to plan.

The Banking (Amendment) Act, 2016, which came into force on September 14, 2016, caps loan charges at four percentage points above the Central Bank Rate (CBR), now standing at 9.5 per cent.

The law also requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.

Critics have accused banks of engaging in blackmail and economic sabotage to force through amendments to the law.

The law was implemented following concerns raised by consumers regarding the high cost of credit.

A CBK report launched recently, on whose basis the regulator is seeking public comments on the legal caps ahead of the planned review of the rate capping law, said the legal caps on borrowing have undermined the independence of the CBK.

The government has promised the IMF a repeal of the interest rate capping law, leaving consumers under a cloud of uncertainty over the future cost of loans.

Borrowers, who paid exorbitant credit costs before rate cap came into force, will now be watching keenly to see how the Treasury navigates the sensitive and emotive issue either with a partial review or repeal.

The rate cap law was passed in August 2016 in response to the high cost of credit that saw banks make huge profits.

Banks, however, made it clear that they want nothing short of total repeal of the law, arguing that they have put in place measures to prevent a return to the days of usury.

“We will be looking for a total removal of the cap. We now have in place a number of measures, some ongoing, addressing concerns around opacity in pricing of loans through the cost of credit website that allows borrowers to compare loan charges comprehensively across different banks,” Kenya Bankers Association (KBA) chief executive Habil Olaka said in an earlier interview.

“Partial amendments to the law will only create more problems and complications going forward, sending us back to the negotiating table,” he added.

Experts have in the recent past pointed out that banks have been turning to commissions and fees as profit boosters, with a significant increase in these revenue lines likely to mitigate the impact of narrowed lending margins.

The top eight commercial banks income from commissions and fees surged eight per cent or the equivalent of Sh4.86 billion last year.

This was reported even as lenders sought to boost profits through fees and charges on consumer products and transactions to beat the rate cap law, which has seen their interest income margins thin.

A review of the top lenders’ financial statements for the year ended December 31, 2017 shows that the eight Kenyan banks earned Sh68 billion in the period from Sh63.1 billion during a similar period the previous year.

At the same time commercial banks pumped more money into government securities in the year to December 2017, even as they tightened credit to private enterprises and individual customers.

Financial statements for the year ended December 31, 2017 show that the top eight Kenyan banks invested Sh83.9 billion or 15 per cent more in government debt for a total of Sh625.1 billion in the period under review.