The Central Bank of Kenya has bowed to pressure and established a committee to look into the reasons behind the abnormally high interest rates charged on loans by commercial banks, and which have been blamed for stifling business growth in the country.

The committee is expected to come up with recommendations on how to bring down the interest rates and ensure fairness in the vibrant financial sector. The committee comprises officials from the central bank, commercial banks and the Ministry of Finance.

“The establishment of the committee is welcome and we hope we will come up with the way forward on the issue,” said Habil Olaka, the chief executive of the Kenya Bankers Association.

The committee was established following constant pressure by Kenya’s Deputy President William Ruto, who in the recent past has been at the forefront in the fight against high interest rates.

Mr Ruto has accused banks of exploiting Kenyans by overcharging them whenever they seek loans for business.

“We must interrogate why the interest rates in Kenya are between 12 and 15 per cent while it is only three in India, five in Nigeria and two per cent in the US. There is a problem,” Mr Ruto said recently.

In 2012, Parliament defeated Finance Bill 2011 sponsored by Gem MP Jakoyo Midiwo to cap interest rates banks can charge. The Bill proposed to cap the maximum interest rate at not more than four per cent of the Central Bank Rate (which currently stands at 8.5 per cent), and the minimum saving rate at 70 per cent.

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A similar effort to regulate the lending rate failed in 2001 when the High Court ruled that an Act capping the lending rate was unconstitutional.

A recent World Bank report cited high interest rates charged on loans as one of the problems crippling the growth of small and medium enterprises.

“High rates leave them with little recourse but to dig deeper into their personal savings or turn to family and friends to raise funds for day-to-day operations. Given the seminal role SMEs play in growth and job creation, channelling credit to this sector is a critical function of banks,” the report titled Re-invigorating Growth with a Dynamic Financial Sector said.

SMEs have been identified as key to the realisation of the Vision 2030 which seeks to transform Kenya from a low income country to a middle income status.

“The difference between the average rate of interest charged by banks on loans to customers and the average rate of interest banks pay on savings/deposits remains persistently high. At the same time, banking sector profitability has grown,” the report adds.

It is this issue, also known as the interest rate spread, that has put the Deputy President on a warpath with banks.

The net interest rate spread is a key determinant of a financial institution’s profitability or lack of. The greater the spread, the more profitable the financial institution is likely to be.

According to CBK data which was published recently in the Business Daily, commercial banks posted a whopping Ksh111.5 billion ($1.29 billion) in profits for the first 11 months of last year. The record profit surpassed the full year performance for 2012, which stood at Ksh107.7 billion ($1.25 billion).