Caps on interest rate unlawful, court rules

A court on Thursday declared unconstitutional the section of the Banking Act that introduced interest rate controls.

However, the Commercial and Admiralty Division court suspended the enforcement of the ruling for 12 months to give lawmakers time to amend the law.

"Although the responsibility of the Central Bank of Kenya in setting and publishing the Central Bank Rate under Section 36 of the Central Bank Act is undoubtedly a function of formulating monetary policy, the petitioner (Mr Boniface Oduor) has not demonstrated to the satisfaction of the court that the provisions of Section 33B, relating to interest rate capping, falls within the purview of monetary policy," the court said in its press summary.

The statement went on: " For that reason, the court cannot fault the National Assembly in legislating a provision on interest rate ceiling. In arriving at the decision, the court gives deference to the principle of the presumption of constitutionality of legislation."

SMEs HURT

After the law was effected in September 2016, small and medium enterprises have been complaining of reduced lending by commercial banks, dealing a blow to the country's economic growth plans.

Further, the national government's appetite for domestic borrowing has seen banks make astronomical profits, a consequence of the caps.

Last year a report showed that KCB, Equity, Cooperative, Standard Chartered and Barclays - the top lenders - raked in Sh56 billion in net profits, Sh6 billion higher than in the same period last year.

REVISE LAW

The strain on the economy compelled some lawmakers to call for revision of the law. Treasury Cabinet Secretary last year said as much: "In order to enhance access to credit and minimise the adverse impact of the interest rate caps on credit growth, while strengthening financial access and monetary policy effectiveness, I propose to amend the banking Act," Mr Rotich said during his budget speech in June.