Rotich faults House bid to cap bank lending rates

Treasury Cabinet Secretary Henry Rotich has criticised the latest attempt by Parliament to regulate bank lending rates by changing the law that governs the Central Bank of Kenya.

Mr Rotich told the National Assembly committee scrutinising the Supplementary Budget the enactment of the law sponsored by Kiambu Town MP Jude Njomo would reduce lending by banks.

“I think we have been very consistent on this matter. Interest cap Bills have come to Parliament several times since the Donde Bill in 2002. We have advised that capping the interest rates is not the solution.

"The solution is to deal with the underlying factors that cause the interest rates to go up,” he told the Liaison Committee.

One of these factors, he said, would be to reduce domestic borrowing by the government, which forces banks to look to the private sector and corporates for borrowers.

Mr Njomo proposes that banks be bound by law to set the maximum interest rate at a maximum four cent more than the base rate set by the Central Bank.

For deposits, the minimum interest rate shall be at least 70 per cent of the base rate set by the Central Bank.

Banks that break the proposed law would be liable to a fine of not less than Sh1 million, with the individuals involved also liable to be jailed for one year or suffer the double jeopardy of both.

Mr Rotich said the Treasury has been working with the Central Bank to reduce interest rates. Their efforts have worked, he said, enabled mostly by the government's reducing domestic borrowing.

REDUCTION OF T-BILL RATES

He cited the reduction of the rates on Treasury bills and bonds from 22 per cent in September last year to eight per cent, which has made them less attractive for banks and made them seek to lend to their customers.

The Treasury has reduced borrowing this financial year from the Sh221 billion it had planned for to Sh170 billion.

“If we don’t do that, we’ll obviously borrow to finance the Budget the way it is. The consequences is just interest rates will go up,” he added.

He said that as long as the Treasury manages its fiscal position and doesn’t have to take credit from the banks excessively, the rates would continue coming down.

Mr Rotich argued that setting the base rate also means that the banks don’t come up with arbitrary rates on which they would pile the other factors that make loans expensive.

“What we have achieved a lot is that credit is very available. The risks that we face with controlling interest rates is that once you fix it to some level, what will happen is that banks will cherry pick.

"They will just look for people who have high credit scores. The cost is that other people who could get credit will not get,” he added.

Mr Rotich said this would become the equivalent of the price controls that were there in the late 1980s and the early nineties, which were characterised by artificial shortages due to hoarding.

But nominated MP Johnson Sakaja said the question many of those who back the Bill have is why a bank would have its interest rate at 10 percentage points above the Kenya Banks Reference Rate (KBRR).

Mr Sakaja also questioned the practice of government ministries and other agencies putting money taken from the Treasury in commercial banks and the government then borrowing from the same banks with the effect of making credit expensive for the ordinary customers.

COMPETING FOR DEPOSITORS

“When you say banks will cherry-pick their clients and people will not be able to afford this money, already many cannot afford that credit, especially the young women and men. The banks look like they are competing for depositors, but when it comes to setting their rates, they collude and are having all of us for lunch,” he added.

Mr Njomo's Bill was supported by MPs when its second reading started in the National Assembly two weeks ago, with many lamenting that banks are making insanely high profits at the expense of poor Kenyans.

Majority Leader Aden Duale said the MPs would marshal the two-thirds majority needed if the President rejects the Bill once passed by Parliament.

It has also been backed by the Consumers Federation of Kenya (Cofek), whose chief executive, Stephen Mutoro, told the Nation he had been in touch with Mr Njomo and expressed support.

“That is a Bill supported by consumers because of frustration with previous pledges to stem interest rates that have always failed,” he added.

Mr Mutoro said there would be a lot of pressure from the Central Bank, the Treasury and the Kenya Bankers Association for Mr Njomo to withdraw the Bill.

MANAGEABLE LEVELS

“If the Bill is to be defeated, let it be defeated on the floor of the House and not by withdrawal,” he said.

He said that while the KBRR came about because of efforts to deal with high interest rates, the Treasury and the CBK had still not managed to tame rates on the government’s bills and bonds.

“There has been no commitment by Treasury to put interest rates to manageable levels and in our view, the threats by the bankers to withdraw loans from consumers should be ignored on the basis that Treasury should not borrow from the local market,” he added.