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Imposing Caps on Interest Rates will Instigate Financial Exclusion

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Last week Kenyans witnessed a move by parliament to cap the market interest rate after its abolition back in the 1990s. The Bill was formally introduced to the National Assembly after being read a first time on December 2, 2015 and committed to the Finance, Planning and Trade committee for consideration. The National Assembly led by Kiambu MP Jude Njomo passed the Banking (Amendment) Bill, 2015 that seeks to cap lending rates at 4% above the Central Bank Rate (CBR) and to also set a minimum interest rate for deposits in interest-earning accounts at 70 percent of the CBR. Analysts argue that it is a move taken by Parliament after the many attempts by the Central Bank of Kenya (CBK) led by Dr Patrick Njoroge have failed to materialize any positive impact. Dr Njoroge has been on the forefront advocating for commercial banks to reduce the interest rates charged on loans with activities such as taming the CBR and KBRR that currently stand at 10.5% and 8.9% respectively, compared to 11.5% and 9.87% respectively in July last. The CBK even started the process of informing the public on the prevailing interest rates charged by the different commercial banks and compelling banks to publish the annual percentage rates.
The argument on the table with capping interest rates in Kenya comes in two dimensions with one being a move to protect the consumers from the exorbitant interest rates charged by banks vis-a-vis shielding the economy against unprecedented consequences associated with capping. Last year on the release of Doing Business Survey that showed improvement in several entities in the Kenyan business sector, the World Bank ranked Kenya 28th among 189 countries on access to credit by customers but it was noted that the cost of borrowing is still high hence creating serious constraint for businesses which the Parliamentarians believe that capping will aid in correcting this menace.
However, the move by parliament is not concretely informed. Kenya is considered a major leader in financial inclusion in the East and Central African region which is a result of liberalization that has been experienced in the financial sector with the past regimes. The effect of capping interest rates will have far much reaching consequences to the economy compared to what is currently being faced with the high interest rates. If the president goes ahead and signs the Bill then the immediate effect that we are likely to face is credit rationing by banks which is a perilous ill to the economy given that it is an outcome of market imperfection. The other havoc that is likely to be provoked with interest capping is corruption. Soon one will need either to know someone or know someone who knows someone who works in Equity, Co-operative Bank, KCB, the reformed Chase Bank just to mention a few of the 42 commercial banks including Imperial Bank that is still on receivership. With the loss of the main revenue stream, banks will likely settle on maximizing on their other uncontrollable income elements for instance raising the service charges on loans. All these at the end will hurt the people the bill was meant to protect. It will result in what I term as financial exclusion, an economic infirmity that our country has been fighting for decades now.
The National Assembly had probably only considered the tip of the iceberg overlooking what lies beneath. The CBK has initiated activities in a liberalized manner that are meant to induce sanity in the financial sector which needs more time before they can yield positive impacts in our Kenyan economy. Financial liberalization encompasses two things; the quality and the quantity of financial services. These are two areas that our MPs need address for us to experience economic progress. The quality which is a reflection of effectiveness and efficiency in the banking sector will come from banks reducing their overhead cost which they pass to their clients. Quantity on the other hand reveals the level of liquid liabilities and credit levels. These elements are barred in a regulated environment given that banks lack the incentives of initiating them. The ball has been thrown to the president who can either approve or reject it. Let’s wait.
By Vincent Lagat
Investments Analyst

email: vincent@indepthinvestment.co.ke

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