How the rate cap sparked change to an ‘indisciplined’ financial sector

The interest rate cap has brought a substantial level of positive change to the financial sector this in spite of its well documented regressive effects.

Effected by Parliament through the Banking (Amendment) Act of 2015, the rate cap has played a crucial role in shaping up the banking sector pruning in its stay rogue and unscrupulous practices in the industry.

The change for the better can be seen in the institution of improved provisions geared in great part towards better addressing customer concerns.

New rules

It is from the new instilled regulations that the financial sector now backs its renewed push for the repeal, at the centre of the thrust being the Central Bank of Kenya (CBK) and the National Treasury.

“Already the CBK is dealing with consumer protection issues in the banking sector. I am in this year’s Finance Bill proposing a repeal of section 33B of the Banking (Amendment) Act, 2016. I am convinced this will unlock credit to the private sector and in particular to the MSMEs,” Treasury Cabinet Secretary Henry Rotich told MPs during the presentation of his budget statement last week.

CBK’s Banking Sector Charter of 2018 which was on-boarded at the start of March 2019 represents the key regulation change to the financial sector bringing with it stimulus to facilitate transparency in the flow of credit to small and medium enterprises (SMEs).

The charter has its base on four key tenets encompassing fairness, transparency, financial literacy and financial access.

To build on fairness, the banking sector has began embracing risk based credit scoring techniques while opening up on miscellaneous costs to credit through the cost of credit website in line with consumer protection guidelines enshrined in the Consumer Protection Act of 2012.

Further, the sector has under the charter adopted the prompt handling of complains from customers instilling stronger recourse mechanisms to address concerns within a shortened window.

Moreover, the sector has committed to the dedication of a fifth of their loan book to SMEs by 2020 while assisting the micro units in capacity development to stem challenges beyond the scope of just capital access.

“We have now addressed the challenges faced by SMEs in terms of their access to credit. Access rather than cost makes for the greatest concern,” Kenya Bankers Association (KBA) Chief Executive Officer Habil Olaka told Citizen Digital in an earlier interview.

Outside the scope of the charter, the National Treasury has committed to the implementation of an SME credit guarantee framework which is expected to work alongside the merged Biashara Fund to address funding to the micro outfits.

Divergence

While stakeholders in the sector have assured of prudency in a post rate-cap environment, parliament still harbours doubts to the recourse, maintaining its original view of the ceiling to lending in spite of the caps significant damage.

Kiambu Town Member of Parliament Jude Njomo and the mastermind behind the rate cap law has in the aftermath of the recent push by Treasury washed down any hopes for a repeal, putting conditions to any consideration for a lift on rates.

“Rotich says the rate cap has hindered credit flow to SMEs but I would argue banks have been pumping all their monies to government debt. I would want to see Treasury put a ceiling to lending from commercial banks before we even think of a repeal,” he said.

CBK Governor Patrick Njoroge meanwhile appreciates the role played by the rate cap in fostering change but is insistence on calling time for the stay of the interest-rates ceiling to unlock more credit to SMEs, having previously equated the law to driving around with an engaged handbrake

“Its true we are going a long-way in resolving this matter but we need to do the right thing. We have done quite a lot in effect deal with the fundamental question that led to the introduction of the rate cap. Maybe it was the way to bring the sector together. The rate cap is now an appendage whose time has come and gone,” Njoroge told a news conference on May 28.

Kenya Business Guide research analyst Titus Maina on the other hand throws a spanner in the works of the repeal debate walking back the forgotten and controversial Financial Markets Conduct Bill that saw a rift emerge between the National Treasury and CBK.

According to Maina, the bill by Treasury which had in part proposed the creation of a regulatory body to duplicate the role of the CBK in monitoring banks could as well feature in the jostle for a repeal.

“There hasn’t been any talk on the bill recently. Perhaps its now time to look at the bill once more and see whether it will provide enough protection to consumers once the ceiling is removed,” he said.

The visitation of the bill could however drive a greater wedge between Treasury and CBK, entities who already hold differing views on the country’s sovereign debt levels to weigh down any opportunities for a rate-cap repeal.

The tough talking CBK Governor had already made known his feelings to the bill insisting on a considerable attack on the role of the reserve bank.

“This is the financial sector equivalent of being asked to trade in your well serviced SUV for a ‘souped’ up Subaru. It may have flashy lights, a stabilizer at the back, noisy exhaust but it is still a Subaru. This is not time for hubris, it’s time for action. Make no mistake, CBK is under attack,” Dr Njoroge told a news conference in May 2018.

The debate on the lift of caps is expected to rage on, backed by the suspension of the law earlier this year by High Court which gave the National Assembly 12 months to make right legal provisions of sections 33b (1) and (2) of the Banking Act which it ruled out as vague, imprecise and ambiguous following a petition challenging the law’s constitutionality.