Kenya’s President Uhuru Kenyatta is set to put the brakes on a move by Members of Parliament to control interest rates and instead push for broad policy reforms that will make the running of businesses easier.

The president is this week expected to decide on the hugely popular but controversial Banking (Amendment) Bill 2015, which was passed by Parliament last month.

The Bill seeks to cap lending rates at four percentage points above the rate at which the Central Bank lends money to commercial banks in distress, commonly called the Central Bank Rate (CBR).

State House spokesman Manoah Esipisu said in a statement on July 31 that while the president was committed to having lower interest rates — one of his key campaign pledges — he had “noted the views of the Central Bank as well as the concerns of the banking sector at large.”

Also significant is a carrot thrown into the menu of options by the banks, by way of offering to advance, at concessionary rates, some $20 billion to SMEs whose plight the interest rate caps seek to address.

“The president warmly welcomes the goodwill proposals put forward by commercial banks; they have offered to set aside over Ksh2 trillion ($20 billion) for lending to SMEs at concessionary rates. Ultimately, the president believes that all stakeholders will find a solution to this issue,” the statement said. 

The Bill also proposes that money held in interest bearing accounts attract a deposit rate of at least 70 per cent of the CBR. With the CBR now at 10.5 per cent, the maximum lending rate would be 14.5 per cent and the deposit rate 7.35 per cent, giving banks a margin or spread of seven percentage points.

The average lending rate in Kenya is now at 18 per cent although some lower tier banks and microfinance institutions are offering loans at around 25 per cent. The interest rate spread, however, is 11.4 per cent, lending credence to suggestions that commercial banks are prospering at the expense of other sectors of the economy.

Resisted public pressure

President Kenyatta has once before, when he was finance minister in 2011, resisted public pressure to introduce interest rate ceilings, saying this would distort the lending market and disadvantage riskier segments of borrowers like SMEs who need the credit most.

That view is also held by Treasury Cabinet Secretary Henry Rotich and Central Bank Governor Dr Patrick Njoroge, two of the advisors the president would lean on before making the decision. The other key advisor, Attorney-General Prof Githu Muigai is expected to point out legal inconsistencies, usually the basis for sending Bills back to parliament for amending.

“Reinstating interest rate caps will lead to the emergence of credit rationing and the unavailability of credit to a wide segment of the population — particularly SMEs, new and small borrowers — with immediate adverse consequences for job creation and poverty,” Dr Njoroge said in a statement sent to The EastAfrican. He added that controls would open the doors to more informal channels (shylocks) and an increase in non-interest fees on bank customers.

“Capping interest rates will be ineffective if credit is not available or other terms of borrowing are unduly punitive,” he concluded.

READ: NJOROGE: It's time for a 'down payment' in Kenya's banking industry

Kiambu Member of Parliament Jude Njomo, who sponsored the Bill, said he was motivated by the need to close the gap between the haves and the have nots because banks have for a considerable time being enjoying profit as other sectors of the economy issue profit warnings.

READ: Kenyan MPs push for control over interest rates

Commercial banks last year posted a total profit before tax of Ksh145 billion ($1.45 billion), 2.8 per cent above the previous year’s, even as a record 20 listed companies issued profit warnings, meaning their profits fell by more than 25 per cent.

Kenya abandoned interest rate controls in July 1991 with the liberalisation of the economy. Its partners in the East Africa Community— Burundi, Rwanda, Tanzania and Uganda — also abandoned interest controls around the same time, Dr Njoroge said, finding that they had “overwhelmingly negative consequences for businesses and consumers.” Under the convergence criteria meant to lead to an EAC monetary union by 2024, the partners agreed to pursue market economy policies.

Market forces

Despite the partners being under pressure to address the cost of borrowing, they view interest rates caps as a measure of last resort. Prof Manasseh Nshuti, a senior economic advisor to Rwanda’s President Paul Kagame, said legislation should only be used where market forces do not work.

“Market forces are better but again if they do not work, other means like legislation can be used,” he said. One such situation, he said, was where there is a wide spread between the policy rate and the effective lending rate.  

The managing director of Banque Populaire du Rwanda Sanjeev Anand, said caps would not be good for any market especially because interest rates track inflation rates, exchange rates and stockmarket prices.

“So, with the caps on interest rates, banks will have reduced capacity to finance higher risk projects. New projects, startup ventures, new industries and expansions will suffer in Kenya. So I don’t think it is a healthy development,” Mr Anand said, adding that prices of monetary instruments should be determined by demand and supply and cost of supplies.

Tools of a bygone era

Audice Niyonzima, the director of research and statistics at the Burundi Central Bank, said controls on interest rates were tools of a bygone era.

“Controls or lending and deposit rates were widespread before 1990. Rates are now negotiated between the client and the commercial bank,” Mr Niyonzima said.

The average lending rate in Burundi is at 17 per cent, the same as in Rwanda, and deposit rates are at between seven and eight per cent.

In Uganda, where high interest rates are frequently criticised, the government has insisted on its liberalised stance. The Bank of Uganda, however, shares the frustration of Dr Njoroge that rates do not fall as fast as they rise in response to policy decisions. Commercial bank lending rates in Uganda are now at between 22 and 24 per cent against a benchmark rate of 15 per cent.

BoU reduced the CBR to 15 per cent in June 2016 from 16 per cent in April 2016, according to the Monetary Policy Statement for June 2016 issued by BoU Governor Prof Emmanuel Tumusiime-Mutebile.

There has been debate in Kenya among bankers, legislators and analysts who differ on whether the cap on lending rates will increase the flow of credit to small traders.

Bankers insist the interest caps would constrain lending to riskier groups but MPs say they is needed to bring equity in a market slanted in favour of big corporations. Chief executives of banks would be held liable for not complying with the interest caps and face a fine of $10,000 or one year in jail.   

Kenya Bankers Association chief executive Habil Olaka has said banks will be forced to restrict themselves to lending to only blue chip companies and high net worth individuals. 
Economist and researcher Emmanuel Manyasa told The EastAfrican that MPs should come up with good policies and legislations that will instead cap government borrowing in the domestic market, forcing banks to direct credit to the productive sector.