Budget committee opens to amending rate cap

Budget committee opens to amending rate cap

The chair of the Kenyan parliament’s influential budget committee said on Monday there was a case for altering a cap on commercial lending rates, blamed by the International Monetary Fund for sluggish credit growth to the private sector.

Kimani Ichung’wa said a removal of the floor on deposit rates would allow banks to negotiate with their customers and give the central bank some wiggle room.

Reacting to public complaints about high lending rates in Kenya, the government capped bank interest rates at four percentage points above the benchmark central bank rate in 2016. It also set a minimum deposit rate of 70 percent of the policy rate, which stands at 10 percent.

The caps forced banks to stop lending to customers who are perceived as risky. Bank executives blame the caps for sluggish private sector credit growth, which slowed to 2.4 percent in the year to December. The central bank says the ideal rate is 12-15 percent.

The central bank opposed the caps before they were imposed and last week the International Monetary Fund asked the government to remove them.

“It allows the central bank to have some flexibility in terms of monetary policy,” budget committee chair Ichung’wa told Reuters.

Policymakers said last month that although there was room for easing, they had not changed rates, as the central bank studied the impact of the rate caps on the effective transmission of policy.

Ichung’wa said lawmakers, the Treasury and banks were discussing possible solutions, but cautioned that the public interest must also be protected.

“Can they (banks) be trusted to self-regulate? I don’t think they can because they are profit-motivated,” he said, adding that the ceiling on lending rates were likely to stay in place.

“We must come to a situation where we all agree we will have some sort of regulation but one that allows flexibility.”

He said lawmakers were not worried by the country’s debt, which has shot to 50 percent of GDP since 2013, saying it was well below the 74 percent level that would raise alarm.

“We are within acceptable thresholds. The country is still capable of settling all its debts when they are due so we should be ok,” he said.

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