Banks free to set higher interest rates as Uhuru approves Finance Bill

President Uhuru Kenyatta has signed into the law the Finance Bill 2019 giving nod to among other provisions, the free setting of interest rates by commercial banks.

This comes after Members of Parliament chose to side with President Kenyatta and banks on the lifting of interest rates in a session ditched by the majority of the legislators.

While MPs had originally passed the Bill without the amendments to section 33b of the Banking Act, President  Kenyatta refused to assent to the Bill and instead recommended that Parliament lift the ceiling on lending.

In a memorandum read out to MPs on October 17, the President expressed his reservations with the interest rate caps introduced in September 2016, saying they have caused “unintended effects that are significant and damaging to our economy.”

“It is apparent that the capping of interest rates has caused unintended effects that are significant and damaging to our economy and in particular, the Micro Small and Medium Enterprises (MSMEs) which are the hardest hit,” read part of the memo to MPs.

Among the other highlighted effects included lowered private sector credit and the severed monetary policy transmission by the Central Bank of Kenya (CBK).

Subsequently, the lifting of interest rate caps has culminated in the heightened fear for the return of expensive loans to Kenyans seeing that banks will now carry the prerogative to set new rates.

Nevertheless, the banks have come out in the defensive to pitch for inexpensive loans saying the finance sector has undergone considerable change in the three-years since the introduction of the rate cap to assure customers of no sudden increases to interest rates.

“The fear that we will be unreasonable is unwarranted as we have repriced ourselves in the last three years. The pricing by banks is not something you wake up and roll the dice on,” Kenya Bankers Association Chairman Joshua Oigara said on Wednesday.

The lenders have anchored the expected retention of current interest rates on recent sector reforms that have by the bank’s account created order and transparency in the issuance of loans to clients.

Among the taunted corrective measures by banks is the move towards risk based credit pricing and the open declaration of all loan servicing fees and commissions.

The amendment of the repeals section of the Banking Act is expected to impact the interest rate charged on new loans while the rate charged on existing loans is expected to hold at four percent above the roaming Central Bank Rate (CBR) presently translating into 13 percent.