Central Bank pushes for bank discipline post rate cap removal

The Central Bank of Kenya has defended its move to push for a review of laws capping interest rates.

The regulator says it will oversee discipline in the sector to ensure banks do not return to the higher interest rate regimes

According to the Central Bank governor Dr Patrick Njoroge, banks will be pushed to improve their lending practices and tame their appetites for profits

“What you saw before was a level of high indiscipline by banks in terms of setting rates and lending to investors, We want to improve the market discipline. They have to be more business oriented. In particular, they have to price risk,” Dr Njoroge said at a briefing on Tuesday.

The rate caps have slowed credit growth playing a role in the quarter one 4.7 percent depression in the economy.

The regulator however said there would need to be a transitional phase should the cap be scrapped to ensure borrowers are not burdened with higher interest repayments by banks.

“There will be a time of transition because this is what policy is about,” he stressed.

As part of the measures, the regulator has initiated a review of the credit information sharing framework to make it more applicable to banks and borrowers.

“If you have a good credit history, that has to work in your favor……. compared to someone who has never borrowed,” he said.

The challenge with the credit information sharing framework has been its use to only pick bad data on borrowers while not being used to reward good borrowers with better interest rates.

In the envisioned central bank restructure of the framework, the regulator expects the credit scoring system to enable borrowers get better rates based on their credit history.