KBA warns cap on interest rates will lead millions to loan sharks

Bankers have warned that millions of Kenyans risk being locked out formal credit channels should the president pass into law amendments to the banking act.

The Kenya Bankers Association (KBA) says plans to cap interest rates will force banks to deal with individuals and institutions deemed to have a better credit score, locking out millions of Kenyans.

The remarks come just a day after parliament passed the Bank Act amendment bill which seeks to cap interest rates at four percent above the central bank rate (CBR).

The bankers’ lobby group however argues that should the bill pass, banks will have no choice but to roll over borrowers with poor credit scores.

“The ones who are above the cap will then be released into the market and they’ll have to get alternative funding from shylocks and loan sharks who are not regulated,” KBA chief executive office Habil Olaka said.

With the CBR at 10.5 percent, the move would cap interest rates at 14.5 percent.

The Central Bank of Kenya (CBK) has also objected moves to cap interest rates. While agreeing that banks had kept interest rates high for too long, CBK governor Dr Patrick Njoroge argued the move would have a negative ripple effect in credit supply.

“We will continue to pressure them (banks) to lower their commercial lending rates,” Dr Njorge said on Tuesday.

The regulator’s monetary policy committee on Monday lowered the Kenya Banks Reference Rate (KBRR) to 8.9 percent in an effort of pressuring banks to lower interest rates. CBK plans to introduce new pricing tool for interest rates after revealing that the KBRR had failed to deliver the desired outcome.

Mr Olaka stressed that that industry players need to gain come together to address the underlying challenges that have kept rates high.

“We are concerned about the fact that the rates are high and therefore we need to look at the alternative recommendations and address transparency,” he said.

Kiambu legislator Jude Njomo, who sponsored the bill, however urged the president to pass the bill into law adding that banks have for years taken advantage of borrowers.

“The interest rates in our country have gone amok…. It is not possible for any person to do any meaningful business without a loan,” Mr Njomo said in an interview on Citizen Business Centre.

Interest rates have averaged 19 percent, with some borrowers paying as high as 24 percent to access credit.