By Tom Saida
President Uhuru Kenyatta this week threw caution to the wind and signed into law a popular but controversial Bill that seeks to cap interest rates charged by banks.
Continuing with his populist stunts aimed at hoodwinking voters, the Head of State ignored elaborate professional advice given by the National Treasury and Central Bank against Central Bank (Amendment) Bill, 2015.
The President, who has tried to fight the tag of being elitist, described banks as being insensitive to the wishes of the Kenyans.
“Since receiving this Bill, I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks.
These frustrations are centred around the cost of credit and the applicable interest rates on their hard-earned deposits. I share these concerns,” said the President in a statement.
Some people might see this as a vote-winner which the President will roll-back in the event he is re-elected.
The controversial law was crafted by Kiambu member of the National Assembly Jude Njomo (TNA).
It puts a ceiling on all loans charged by banks and financial institutions at four per cent above the Central Bank of Kenya benchmark which currently stands at 10.5 per cent.
However, it is not clear why a similar piece of legislation brought by the Gem MP Jakoyo Midiwo (ODM) was aborted only to be resurrected by a green-horn Jubilee politician.
As the country gets into the campaign mood, Jubilee seems to have stolen the thunder from the Opposition by pushing through the same Bill.
A similar Bill was sponsored by former Gem MP Joe Donde 16 years ago. And just as Kenyatta, former President Daniel Arap Moi signed the Bill into law only for the banks to finish it off in the Courts for its ambiguous commencement date.
It is not clear why the attempt by Jakoyo flopped only to for it to see the light of the day when fronted by a Jubilee MP.
President Kenyatta, whose family is a shareholder in one of the commercial banks, Commercial Bank of Africa, was under pressure to assent to the Bill after former Prime Minister Raila Odinga put his weight behind it. Critics had warned that the Bill would be counterproductive to the country’s efforts at deepening financial inclusion. Lenders would shun high-risk borrowers, mostly the poor.
It is also feared that as a result of borrowers being locked out from regulated formal banks, the country would witness the mushrooming of predatory shylocks whose interest rate make commercial banks look like a game.
President Kenyatta acknowledged these challenges, but did not give any comprehensive solutions on how his administration would navigate around them.
“We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms,” said Kenyatta.
Indeed, by capping interest rate, the Government is only wiping its own mess, and perhaps in a wrong way. Since coming into power, the Jubilee administration’s appetite for domestic loans has been like no other. This vociferous borrowing from the local market has seen interest rate skyrocket and the private sector crowded out.
This is despite the fact that on their campaign trail, the Jubilee duo of Uhuru Kenyatta and William Ruto promised Kenyans cheaper credits. They promised to stay out of the domestic market, and borrow externally to finance their ambitious Budget.
However, by April 2015, the country’s domestic debt stood at a whooping Sh1.4 trillion (25 per cent of the gross domestic product).
Moreover, CBK which is charged with the role of regulating the financial sector has been a dog that barks but does not bite. Although the CBK Governor has, several times, bemoaned the high interest rates charged by banks, he has barely cracked the whip.
The banking sector continues to illegally operate in an oligopolistic fashion. Banks, especially the big ones, have been accused of engaging with collusion rather than competing against each other, and driving the price of loan products down.
The Cabinet Secretary for National Treasury Rotich even went further to claim that banks were making super-normal profits, advancing billions to their shareholders even as average Kenyans struggled to make ends meet.
Last year, banks raked in Sh134 billion in net profits against a backdrop of a subdued economic environment.
When it is put as a gazette notice in the Kenya Gazette and becomes operational, borrowers who have borne the brunt of high interest rate will now get credits at not more than 15 per cent. It will be interesting to see how the law will be implemented given that it does not state whether it will apply to the current loans as well.
Legal practitioners, however, note that consumers who are currently servicing their loans might not benefit from this legislation. In principle, the law cannot be applied retrospectively.
It is also not clear whether the law caps commissions and fees charged by banks. It is feared that banks might sneak in these fees to cover for their lost income interest rates.
The Bill will not come into law until the Cabinet Secretary for National Treasury brings in some regulations to operationalise it. Indeed, it is possible for one of these regulations to remove the sting from the law.
Immediately the president announced that he had assented to the Bill, banks, through their umbrella body the Kenya Bankers Association (KBA) said that while they comply with the law, they still had reservations.
KBA CEO Habil Olaka said that banks will not take in a risk that is higher than 14.5 per cent, going by the current CBR rate of 10.5 per cent, and the existing interest rates will continue to apply until that law comes into effect after the law has been gazetted.
The Kenyan Weekly newspaper is a fresh general-news publication published on newsprint once a week.