Business

Banks to retain interest rates on current loans

Banks to retain interest rates on current loans
  • The law, which came as a relief to many bank customers, ended the era of expensive loans, which had seen commercial banks make billions of shillings.
  • The CBR has remained at nine per cent for most of this year, forcing banks to only lend at a maximum of 13 per cent.

Commercial banks will not adjust the interest rates on loans already taken after the law capping interest rates is repealed.

In the biggest concession yet to Parliament in a bid to scrap the interest rate capping law, lenders, through the Kenya Bankers Association (KBA), the sector lobby group, offered not to increase interest rates on current loans, as has been the practice in the past.

Instead, only new borrowers will pay the new rates in line with their risk profile.

“Banks are committed to maintaining the current customers’ loan contracts within the existing contractual framework,” the memorandum signed by KBA Chief Executive Officer Habil Olaka says.

The memorandum has been sent to Parliament as part of the submissions for the finance bill, through which the National Treasury seeks to do away with the interest rate capping law.

“It is only new loan contracts that will be risk-prized post the repeal of the interest rate capping law,” Mr Olaka added.

COSTLY LOANS

Commercial banks have in the past two years put up a spirited fight to reverse the interest rate capping law sponsored by Kiambu MP Jude Njomo.

The law, which came as a relief to many bank customers, ended the era of expensive loans, which had seen commercial banks make billions of shillings through charging high rates.

They were charging as high as 21 per cent for non-secured loans, but paying peanuts for deposits. But the law introduced on September 2016 brought these excesses to an end after it capped lending rates to four percentage points above the Central Bank Rate (CBR).

The CBR has remained at nine per cent for most of this year, forcing banks to only lend at a maximum of 13 per cent.

But banks argue that the law has not achieved its intended purpose since it ended up denying small businesses access to credit.

“The law was intended to spur credit growth in the market especially to unsecured individuals, micro, small and medium enterprises. However, this objective has not been realised,” KBA says.

CREDIT GROWTH

Banks say it has also affected the conduct of monetary policy and overall economic performance at the household, enterprise and macro levels.

“The proposed repeal will address the challenge of many individuals accessing high cost of credit from nonbank lenders after being pushed out of the banking system by the law,” KBA adds.

Lenders had the support of the Central Bank of Kenya (CBK) and the Treasury in pushing for the repealing of the law.

Last year, two attempts to scrap the law through the finance bill and the courts failed.

The CBK has also been under pressure from the International Monetary Fund (IMF) to push the Treasury to have the law repealed.

IMF'S DEMAND

Removing the caps on interest rates is one of the promises Kenya made to the IMF as it negotiated the renewal of the Sh150 billion standby credit facility when it expired last year.

Meanwhile, the High Court had given Parliament until March next year to re-examine the law, on the grounds that it was unconstitutional.

But Mr Njomo has moved to fix the loophole by introducing a fresh bill in line with the court’s directive.

Failure to amend the ambiguous section of the act meant going back to a free-floating interest rates regime, where commercial banks set the cost of loans.