MPs reject rate cap repeal, raise savings interest

Banks will pay more on deposits if Parliament adopts the proposed amendment to the banking law that seeks to retain the legal cap on lending rates.

The parliamentary Finance and Planning Committee has voted to increase the interest that banks pay on savings to match the Central Bank of Kenya (CBK) base rate, which currently stands at nine per cent.

The current law demands that lenders pay at least 70 per cent of the base rate as deposits, putting the minimum saving rates at 6.3 per cent.

The proposed changes to the law will offer more returns to those with money deposited in banks but will further squeeze lenders’ profits.

The committee has also retained the four percentage points ceiling on loan charges above the base rate set by the Central Bank of Kenya, defying Treasury secretary Henry Rotich’s proposals.

Repealing the rate cap

In June, Mr Rotich proposed repealing the interest rate cap, a move approved by bankers who had said the ceiling had hurt credit growth and access to borrowing.

Annual private sector credit growth was 2.8 per cent in the year to April, well below the ideal growth rate of 12-15 per cent, according to the Central Bank.

The International Monetary Fund demanded the repealing of the rate cap as a condition for Kenya to access its balance of payments support.

The House committee did not give a reason for retaining the rate capping.

READ: Depositors get raw deal in bank interest

There is, however, confusion on whether the committee wants to retain Central Bank Rate (CBR) as a benchmark or revert to Kenya Banks Reference Rate (KBRR), which was suspended in January 2017, after the enactment of the rate capping law in September 2016.

KBRR, the industry-wide benchmark rate introduced in July 2014 and reviewed after every six months, was based on an average of the CBR during the period and the weighted two-month average of the 91-day Treasury bill.

Equity Bank Group chief executive James Mwangi earlier warned that failure to scrap interest controls would send shock waves among “optimistic” businesses whose financial needs may not be met by small-ticket loans micro-financiers such as mobile lenders offer.

“What they (MPs) will be doing is continue marginalising the Kenyans who cannot get bank loans and leave them to borrow from Shylocks at about 30 per cent per month, telecoms at five per cent per week or from microfinance institutions that charge them up to 48 per cent,” Mr Mwangi said.

“Basically, they will be throwing Kenyans under the bus.”