Government and banks must find alternatives to lifting interest cap

Members of Parliament have vowed to veto the memorandum by President Uhuru Kenyatta requesting that the interest cap rate be removed from the Finance Bill 2019. The president urges that the cap has presented lending challenges to the Micro, Small and Medium Enterprises (MSMEs).

Whereas the House, which has a history of pulling in different directions when the public needs them most, will need a two third majority to overrule the presidential memorandum, the reasons to uncap interest rates remains unclear if not sinister.
The president has argued that it has had negative impact on MSMEs. This may well be true, even if he has not given data to support this argument.

The Central Bank of Kenya (CBK), as the institution that is supposed to stimulate the economy, must find ways to apply social, not just economic indicators, when advising on government financial policies. At the moment it seems that what is in use is the aversion of commercial banks to absorb risk from their core business of lending money.

It is probably logical that the banking sector, which absorbs about 80 percent of lending in the economy, should take a lead in informing economic policy. But, the remaining 20 percent of lending, distributed between SACCOs, Chamas, microfinance institutions and welfare organisations may be where the life of ordinary citizens is centred as far as economic theory and personal finance is concerned.

LOCKED OUT

If the CBK wants to stimulate an economy that is not doing well, it lowers the base rate, which would translate to lowering of interest rates that are set no more than four percent of the CBK rate. But in Kenya this translates to more people being locked out of the so called formal lending, based on the argument that the president is using.

Commercial banks profile customers in sectors and the SME sector is generally considered to be of higher lending risk and are therefore likely to be lent money at rates higher than the 13 percent allowed in law (four percent higher than the nine percent CBK lending rate). The gap between the prescribed risk and the real risk only increases when the base rate is lowered. This makes no sense economically, but merely confirms that Kenya is a ‘peculiar’ country.

It can also be assumed that the 20 percent of the population which is locked out by these law, which does not rightfully allow banks to price risk at the expense of the customer, are the ones borrowing from mobile money lenders. It is very interesting that the sector is said to turn over billions of shillings in micro amounts in a very short period. That in itself is a clear indication that these borrowers cannot be ignored.

What is interesting is that the government seems to be willing to protect and defend the banking sector’s refusal to develop their own policies to manage risk at the expense of the population whose interest should be their primary concern. Yet the banking sector is not willing to give up on these twenty percent of borrowers, and many banks are now getting into mobile lending to compete with Safaricom and other players in that sector.

STUDY

Since the primary argument is that the risky population defaults on loans, a study needs to be done on how and why these ‘high risk’ borrowers manage to honour the mobile money debts and if the lending turnover statistics are indicative of social and or cultural situations that the banking sector has failed and or refused to take into account when lending to the Kenyan population.

It is also not clear what percentage of the 20 percent is using the mobile lending and if the money is being used for any useful economic or social purposes, or it is just being recycled in a vicious cycle of borrowing, paying and borrowing again, without adding any value to the money.

This is creating a personal Ponzi scheme in which only the lender benefits from interest. In such an instance the money borrowed in the economy is not a good indicator of the economic situation, but rather of a flawed socio-cultural environment.

But perhaps the one place that the members of Parliament can start by remedying these flawed economics of Kenya would be forcing the government to stop mopping local liquidity as it presents close to no risk for commercial banks. They have become too lazy.

Twitter: @muthonithangwa