Banks draw up plan to negate capping of interest rates

Commercial banks have come up with a seven point plan which they hope will negate the need to cap interest rates via legislation.

Under the umbrella of the Kenya Bankers Association (KBA), the lenders have presented a memorandum of understanding (MoU) to the Central Bank of Kenya (CBK) with the promise of lowering interest rates.

Among the proposals bankers have put forth, is to respond to the CBK’s move to lower the Kenya Banks Reference Rate to 8.9 percent and notify clients of the changes to the cost of their loans.

Speaking during the presentation of the MoU, KBA Chief Executive Officer Habil Olaka maintained a controlled interest rate regime would be counterproductive to the sector.

“As KBA, we are committed to bringing down the cost of borrowing and enhancing access to credit at affordable rates, without introducing a control mechanism through legislation,” Mr Olaka said.

Other proposals spelt out in the MoU include a restructure of the banking business model to give depositors better terms as well as a structured approach to reduce interest rates through central bank policy transmission. The bankers have also proposed the introduction of risk based lending.

KBA chairman and Standard Chartered Bank Chief Executive Lamin Manjang said globally interest rate caps have only worked to sent millions of would be borrowers to shylocks and loan sharks offering worse rates.

“The proposal to cap interest rates and set a floor on deposit rates has a very noble objective, but in practice it has ended up with very adverse consequences. Some other countries have tried this before, and evidence shows that in such countries the ratio of credit to GDP is lower than the regional average,” Mr Manjang said.

Parliament last month passed an amendment to the Banking Act seeking to cap interest rates to four percent of the central bank rate (CBR). With the CBR currently at 10.5 percent, interest rates would drop to just 14.5 percent from the current market average of 18.5 percent.

CBK governor Dr Patrick Njoroge said banks had expressed willingness to address the issue credibly and expeditiously but there will be further work in the next weeks and months to ensure that other measures are put to reduce interest rates.

“The concern that this issue raises and that interest rates need to come down we also ask commercial banks to make a credible down payment and also emphasize that further action  need to be pursued so as to lower interest rates in a sustainable way,” Mr Njoroge said.

Banks have also committed set up a Sh30 billion kitty to lend to small and medium enterprises which they can access at rates below 15 percent.