Parliament must not give up war on capping interest on bank rates

In rejecting the Finance Bill, 2019 passed by the National Assembly on September 26, President Uhuru Kenyatta highlighted a number of issues as the basis of his decision.

In his response to Parliament, he stated that the main purpose of capping interest rates was to address the concerns around affordability and availability of credit, especially to the common mwananchi, which, in his view, had not been achieved.

The President may have been right in stating that the law had not achieved the intended purpose in entirety.

But we need to step back and ask ourselves what necessitated the drafting of this bill and its subsequent passing, in the first place, and why it does not seem to have achieved the intended goals.

Given space, banks can go rogue in a capitalistic environment like ours, and I believe the drafters of this law were motivated by the perception and, in many cases, the reality that banks were insensitive to their customers.

Typically, governments introduce interest rate ceilings as a response to concerns about predatory lending, especially when consumers are struggling to afford high-priced loans.

Whether things have changed for the better to warrant the scrapping of the caps is debatable.

What is clear is that the private sector players, especially in the micro and small enterprise segments, have been hurting since the law came about in mid-September 2016.

This was an expected consequence in the absence of proper ground rules to ensure the enforcement of the interest capping law.

Lack of such rules has given banks the leeway to ‘blackmail’ the government by deliberately limiting access to credit to a critical sector of the economy — the private sector.

Banks say the micro and small enterprise segments sector is too risky for business.

But then, even the formal ‘non-risky’ sectors, such as manufacturing, construction and agriculture, haven’t been given much attention either. Instead, banks have found refuge in government securities.

According to the Central Bank of Kenya (CBK), government bonds accounted for more than 20 per cent of total liquidity of the banking industry, 24.36 per cent of total assets held by banks and 16 per cent of total income of the banking industry as at December 31, 2018.

Equity Bank, for instance, reported that government securities accounted for 54 per cent of its loan book during that period.

By doing this, banks have chosen to abandon their key role of stimulating economic growth through lending to the private sector, at the detriment of the economy.

CBK should have anticipated this and laid down some ‘play-by rules’.

Could the banking regulator’s laxity be an indication that it is out of touch with the circumstances leading to the introduction of such a law?

If there were laws compelling local banks to lend out a certain fraction of the cash they hold in deposits to the economy, as is the case in Nigeria, they would have complied with the rate cap and still made huge profits.

Central Bank of Nigeria (CBN), in an effort to keep the credit flowing in Africa’s largest economy, set a regulatory lending target for banks with stiff penalties for default.

In July, it asked the lenders to maintain a ratio of lending to at least 60 per cent of their deposits by September or face a higher cash reserve levy. Some 12 banks defaulted and paid hefty penalties for it.

In addition, CBN has introduced another set of measures — limiting the amount of money banks and companies can keep in interest-bearing accounts with the regulator.

Instead of scrapping the interest rate cap altogether, Parliament should come up with measures to make banks lend by encouraging them to move funds to areas that support economic growth, which CBK should then enforce.

MPs should also design laws to seal loopholes in the implementation of the law, but one that ensures a win-win scenario for all the parties involved.

Left to play by their own rules, commercial banks will always opt for an easier path to profitability and the lure of investing in government securities is always stronger.