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MP Proposes Amendment to Interest Rate Cap as Loans to SMEs Shrink

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Gatundu South, Kiambu County, Member of Parliament Moses Kuria has proposed an amendment to the Banking Act which had capped the interest rates that banks can charge on loans at a lending cap to 10 per cent above the Central Bank Rate (CBR) .

In the amendment, Hon Kuria wants the interest rate cap to be raised by a margin to accommodate Kenya’s Small and Medium Entreprises. The current law caps the rate to 4 per cent above the CBR.

The legislature says the regulation has led to serious unintended consequences, as banks have withdrawn lending to SMEs and unsecured individual borrowers.

In the modification of the bill, he has proposed “the introduction of a risk negotiation window of up to 6 per cent above the lending cap for SMEs and unsecured Individual customers to negotiate pricing based on their risk profile and on a willing buyer, willing seller basis

“The amendment will go a long way to free credit to the SMEs, discourage government borrowing from domestic market, drive private sector growth and spur fresh economic activity and growth,” he added.

The current interest rate has removed the leg room for pricing risks stating; “currently credit to the private sector is growing at only 4 per cent slower than both the GDP and inflation, if nothing is done, our economy will dip.”

Another concern brought up is that the cap as it exists puts the interest rate in the same level as the risk-free government papers (Treasury Bills and Treasury Bonds), which has enabled the banks to invest in them and ignore the public masses.

“This has had the effect of a ballooning domestic debt as Treasury’s debt appetite continues unabated. The spiraling debt is the single most threat to our economy and its distorting all fundamentals,” part of his statement read.

This amendment comes at a time when President Uhuru Kenyatta has consolidated his interest in the banking sector through Commercial Bank of Africa, which is in the middle of a merger partnership with NIC Bank, and its recent interest in acquiring Jamii Bora Bank.

In its staff report released on October 2018, International monetary Fund also raised concern on the interest rate cap arguing that it had has impacted negatively on banks’ bottomlines and the overall health of the economy.

“The banking industry in the East African nation has witnessed a downward trend in loan growth, and adverse compositional changes in loan and deposit maturity since it introduced interest rate caps in September 2016. This was in response to high lending rates regime,”the report stated.

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