Parliament quashes interest rate cap repeal.

Today, the Finance and National planning parliamentary committee opposed a move to repeal the interest rate cap suggested in the Finance Bill of 2019. The National Treasury proposed repealing the rate cap to make credit more accessible to small and medium-sized businesses. However, the parliamentary committee chose to maintain the lending rate cap, which requires commercial banks to provide loans at interest rates not exceeding 4 percent above the central bank rate.

Treasury CS Ukur Yattani posits that the interest rate bars Small and Medium Enterprises (SMEs) from access to finance. This is because commercial lenders shy away from risky borrowers due to the interest rate limit. As a result, government entities take precedence in accessing loans, at the expense of business people.

When making a case for the repeal, the CS explained that interest rate caps hurt business borrowers. “Since the interest caps were introduced, lending to the government was increased as credit increased by 2.3 percent up from 19.9 percent while for the private sector, credit reduced by four percent, making it 72.8 percent,” said Mr. Yattani.

On the other hand, Parliament Committee opposed the move arguing that a credit system with no rate caps leaves room for misuse. Parliamentary committee Chair Mr. Joseph Limo contended that he would not expose Kenyans to inflated credit rates for the benefit of lenders.

Furthermore, Mr. Limo suggested segmenting interest rates into high and low rates. Later, the regulator can progressively administer the rates to benefit high profile lenders and cushion small income borrowers.

Interest rate caps are barring access to credit.

Interest rate cap has lowered lending to SMEs.

While the parliamentary committee posits that the interest rates protect the low income from predatory rates, the reality is a far cry. A report by the Kenya Bankers Association shows the economy suffered a blow from the interest ceiling.

For instance, the rate followed a 1.4% decline in GDP following the move’s blow to the banking sector. Also, the report shows a drastic drop in SME lending following the enforcement of the cap.

The interest rate cap makes lending riskier, and the returns less rewarding. As a result, banks use elaborate credit scoring systems to appraise borrowers or require some form of security. Given that most of the “low-income citizens” who the parliamentary committee alleges to protect might not have the security, the interest cap will restrict credit access. Most people will seek refuge in digital lending platforms whose compounded annual rate supersedes bank interest rates by far.