MPs take hard line stand as interest rate capping debate returns

Members of Parliament have turned a deaf ear to the proposed repeal of interest rate caps on commercial bank lending.

While banks have recently joined forces with the Central Bank of Kenya (CBK) and the National Treasury in a resurgent push for a lift of interest caps, the majority of legislators trashed the suggestion as the Banking (Amendment) Bill, 2019 came up for second reading on Wednesday.

“It was necessary for this house to pass this law and protect Mwananchi from the excessive interest rates charged by banks and we got plenty of public support to do it,” said Kiambu Town Member of Parliament and the designate father  to the rate-cap law Jude Njomo.

“Ordinarily as a professional in financial matters I would not support the caps. Banks however decided to go rogue and therefore required the intervention of peoples representatives,” added Suba South MP John Mbadi who seconded the Bill.

The second-coming of the loan interest rate altering deliberations was set in motion by the National Treasury which in June revisited its 2018 proposal to lift controls on lending as a means to provide the much-needed credit to the private sector.

This is after the 2016 implementation of interests ceiling at the rate of four percent above the Central Bank Rate (CBR) saw private sector credit slide in the aftermath to low single digits from a 12-15 percent earlier guidance rate per year.

Falling private sector credit growth has been against Parliament’s expectations of a boom in lending to the private sector with the resulting scenario having instead led to cheap but inaccessible loans.

Further, a March ruling by the High Court scrapped off the hold of interest rates by Parliament but gave the legislators a 12-month window to reconfigure the law in accordance to the constitution in an affair that is set to close out latest in mid-March 2020.

While the majority of MPs resist an alteration of the rate capping law, a fraction of members have seemingly opened up to a review of the law while informing colleagues of deeper rooted banking industry issues beyond the scope of interest rates.

“Controlling the interest rates alone is not going to solve the concerns Kenyans have about banks. We must appreciate that some banks are struggling even with the stay of interest-rate caps,” said  Nyaribari Chache MP Tongi Nyagaka.

No drama

Wednesday’s deliberations have surprisingly mirrored the expectations of the extended financial sector stakeholders who, unlike banks, have largely held out for a much pessimistic view on the possibility of a rate-cap repeal.

While commercial banks have documented evidence of thinning private sector funding and post-cap industry regulations guiding prudence in loan issuance in a quest to have the caps altered, Genghis Capital Research Analyst Churchill Ogutu expects the renewed push to fall on deaf ears once more.

“It’s a bit farfetched to think of a rate repeal at this time. In spite of the persistent lobbying, MPs need a lot more convincing and Treasury seems far from finding leverage to back a possible repeal,” he said.

Commercial banks have in the intermediating time since the entry of the caps pushed their funds towards trading in government debt, locking out the private sector as they price households and businesses as riskier clients.

However, the shift in the lending regime by banks has enabled relentless internal borrowing by government with the stay on caps availing greater liquidity to quench the State’s loan thirst.

Subsequently, interest rates on government Treasury bills on bonds have been on the decline with the yield on a one-year T-bill falling into the single digits from a previously greater rate of 13 percent.

Cytonn Investments analyst David Ngugi says he would find it puzzling were the MPs to lift the caps in their entirety even as he remains open to the possibility of a slight revision to the borrowing ceiling.

“There is no reason as to why the rate cap should be repealed. If private sector credit goes up, government domestic borrowing would likewise take a hit,” he said.