Kenyan President Uhuru Kenyatta faces a unique test in deciding whether to assent to a Bill seeking to introduce ceilings on lending rates after banks disowned his office’s assertion that they had offered to advance Ksh2 trillion ($20 billion) to borrowers at knockdown rates.

A statement issued by the Presidential Strategic Communications Unit on July 26, two days after the National Assembly passed the Bill, to the effect that the offer by banks would be considered in the eventual decision, was taken as a strong hint that the President would reject the Bill.

In the wake of outrage caused by the Kenya Bankers Association (KBA) offering to release only Ksh30 billion ($300 million) to small and medium enterprises at a maximum rate of 14.5 per cent last Wednesday, the ruling coalition lawmakers vowed to join their colleagues in the opposition to force through the legislation should the president veto the Banking (Amendments) Bill 2015.

This has increased the pressure on President Kenyatta to assent to the Bill, which, besides its popular appeal, has won the backing of an unlikely quarter in the Institute of Certified Public Accountants of Kenya.

KBA chief executive Habil Olaka said on Friday that commercial banks were not aware of the $2 billion SME funding proposal alluded to by State House spokesman head Manoah Esipisu in what is becoming a regular weekend media briefing.

“The proposals mentioned by the president’s team did not come from us. I am not privy to any discussion, deliberations and proposals to the government other than what we shared with the Central Bank on Wednesday,” Mr Olaka said.

'Just a suggestion'

He added that a demand by Members of Parliament that commercial banks create a $200 million SME financing fund as a pre-condition for them to back down on the interest rate cap was “just a suggestion” because there had been no discussions with the legislators.

On Wednesday, the lenders through a memorandum signed by chief executives of all commercial banks and presented to Central Bank Governor Dr Patrick Njoroge announced the creation of the $30 million fund together with other proposals they believe will make interest rates more responsive to economic fundamentals.

READ: Kenyan banks rally to lower interest rates amid cap threat

MPs balked at the boardroom deal because it carried no legal force. 

“What the banks are doing amounts to arm-twisting the president to reject the Bill. How sure are we that the memorandum signed between KBA and CBK Governor will stand if not legislated by parliament?” MP Jude Jomo protested when he led four other legislators in declaring they will defy President Kenyatta if he vetoes the Bill.

Previous offers by bankers, the MPs said, were not honoured as soon as the threat of administrative interest caps faded into the horizon.

In March, the leader of the majority in parliament Aden Duale said that he was willing to whip MPs against the president’s wish if it meant Kenyans would enjoy lower lending rates.

“The low interest rates were one of the issues both the government and opposition promised in their manifestos. On this I am ready to marshal the two thirds majority and defeat any presidential veto,” Mr Duale said.

Lamin Manhang, the KBA chairman, however said banks were ready to be monitored and held accountable on the latest gentleman’s deal. “It is not a legally binding document, but when you make a commitment to the regulator, it shows seriousness and that is what we are doing for the public,” Mr Manjang said.

Banks’ offer

A couple of banks followed up on Friday with notices that they had reduced their lending rates to reflect the 0.97 basis points drop in the Kenya Banks’ Reference Rate (KBRR) last month.

The banks’ offer presents a 3.5 per cent reprieve for borrowers who have been securing credit at an average rate of 18 per cent, with some lower tier banks and microfinance institutions offering loans at rates as high as 25 per cent.

The interest rate spread stands at 11.4 per cent, a margin the MPs propose to slash by requiring that deposit rates should be at least 70 per cent of the prevailing KBRR rate — 6.67 per cent now that the reference rate is at 9.53 per cent.

President Kenyatta, Dr Njoroge and Treasury Cabinet Secretary Henry Rotich have at various points discouraged interest rate caps for reduced credit for riskier sectors. They prefer broader reforms that would alleviate the cost of doing business.

READ: Uhuru not expected to sign Bill seeking to cap bank interest rates

“This MoU will allow for interest rates to be more responsive to market conditions. We will keenly monitor implementation of the MoU and communicate performance in a transparent manner,” Dr Njoroge said.

NIC Bank chief executive John Gachora however said it was better for the industry to regulate the rates through market-driven mechanisms.

“This isn’t reactionary in my opinion. We are just forestalling an aftershocks effect on a wider spectrum including the effects on the currency. We have some lenders who are currently giving corporate loans at between 11 and 14.5 per cent,” Mr Gachora said.

Mr Gachora attributed the higher loan transfer costs to taxes such as stamp duty. The banks are now trying to champion the use of credit scores, to be provided for by the credit reference bureaus in a bid to classify the clients into the low, middle and high risk categories.