Rotich and CBK face uphill task in overhauling rate cap law

The Treasury faces a daunting task in its plans to repeal the popular law capping interest rate with Members of Parliament (MPs) vowing yet again to reject any amendments to the Act, which they claim may return the country back to the era of expensive loans.

Treasury Cabinet Secretary Henry Rotich last month confirmed the State will introduce legal amendments to the law setting interest rate despite recent opposition by MPs and mounting concern from borrowers, saying the review will provide consumer safeguards.

Mr Rotich said the State is developing a legal framework that will address the whole management of credit in the economy.

“It is not only the issue of cost of credit but issues of consumer protection. We are going to put forward a package of reforms, which should address the real cause of high credit cost in Kenya and lead to the elimination of law capping interest rates,” said Mr Rotich during the launch of 2018 Economic Survey Report in Nairobi.

But now MPs have vowed to strongly reject any amendments to the law maintaining that they might expose consumers to high rates of credit setting the stage for a major clash between Parliament and the Executive on consumer protection policy.

Kiambu Town legislator Jude Njomo and the architect of the rate capping law told Smart Company that  Members of Parliament have taken a common position in their opposition to removal or overhauling of the law motivated by need to protect consumers from profiteering by commercial banks.

“They (MPs) don’t need to be marshalled or whipped,” said Mr Njomo in the interview.

“They have refused and they do not want to subject their employers (wananchi) to the bank cartels,” said Mr Njomo.

Mr Njomo has in the past accused lenders of engaging in “blackmail and economic sabotage to force amendments to the law.”

“There is a concerted effort by banks, which have formed cartels to keep off credit from the public thus blackmailing parliament or the government into changing a law that protects Wanjiku,” claimed the MP earlier.

The Consumer Federation of Kenya (Cofek) and the Institute of Certified Public Accountants of Kenya (ICPAK) have also warned that the removal of legal limits on borrowing will hurt consumers.

The accountants’ body has noted that 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 last month.

“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,” Mr Mwatu added.

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 Cofek secretary-general Stephen Mutoro earlier.

Mr Rotich’s comment came nearly two weeks after President Uhuru Kenyatta backed plans to review the interest rates cap law, saying the policy has failed to increase credit access to traders.

Speaking at the Chatham House in London last month, President Kenyatta said the government could scrap or modify the laws limiting the rates so that the provisions do not stifle economic growth and the availability of capital for investment.

“It is clear to all that this was going to be the way to make capital available to SMEs (small and medium enterprises) …at a much more affordable rates. It is now obvious that actually that has not transpired and that is why we need to re-look that law,” said President Kenyatta.

The assertion by the Head of State came against the backdrop of a study by CBK on the impact of the rates cap law on the Kenyan economy which said the policy failed to achieve its objective of increasing credit access to SMEs by limiting the cost of borrowing for businesses and individuals.

Further, the study showed a significant decline in loans uptake since the Banking Amendment Act came into effect in September 2016, setting a maximum lending rate at no more than four per cent above the CBK’s base rate, which stands at 9.5 per cent.

Banks have, 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.