Commercial banks and other financial institutions now have the liberty to vary their interest rates on loans following the signing into law of the Finance Bill, 2019, by President Uhuru Kenyatta on Thursday.
The Finance Act, 2019, repealed Section 33B of Banking Act introduced in 2016 by Kiambu Town MP Jude Njomo.
However, it maintains steady interest rates on loans already given by the commercial banks, including arrangements for new loans, after the MPs amended the President’s memorandum on the Finance Bill, 2019.
Mr Njomo’s amendment saw caps on commercial lending rates placed at four percentage points above the benchmark Central Bank Rate to cushion Kenyans from the high coast of loans and exploitation by banks.
Although the MPs had voted twice to reject the National Treasury’s attempts to remove the rate caps, they failed to veto the President’s October 16 memorandum to the House after a quorum hitch.
“Repeal of the Banking Act is expected to enhance access to credit by the private sector, especially the micro, small and medium enterprises (MSMEs), as well as cut out exploitative shylocks and other unregulated lenders,” a brief from State House said.
The new law also introduces tax on income raised from the digital marketplace as a measure of ensuring equity in taxation.
As part of government efforts to support the affordable housing pillar of the “Big Four” agenda, the Finance Act, 2019, exempts the National Housing Development Fund (NHDF) from income tax.
REDUCE ECONOMIC GROWTH
Apart from giving commercial banks free reign on loan interest rates, the repealing of the law means that there will be an increase in the repayable interest on loans, which is likely to lead to an increase in non-performing loans, which will in turn crowd out investment and, consequently, reduce economic growth.
The President had argued that caps on interest rates had led to a decline in economic growth and a weakening of the monetary policy.
He added that banks were also giving fewer loans since they prefer risk-free borrowers, a situation that had led to mushrooming of shylocks and other unregulated lenders in the financial sector.
In its budget proposals to Parliament in June, the Treasury sought, without much success, to repeal the rate cap, arguing that it has constricted private-sector credit growth because banks were not willing to lend to customers deemed risky, including small and medium-sized businesses.
National Assembly Speaker Justin Muturi, Public Service boss Joseph Kinyua, acting National Treasury Cabinet Secretary Ukur Yatani and Attorney- General Paul Kihara witnessed the signing of the bill.
Also present were National Treasury PS Julius Muia and CBK Governor Patrick Njoroge.