Expect favorable outcome from Stakeholder talks on interest cap law review: KBA

By Steve Umidha

Instantaneous engagements by financial industry players, regulatory bodies and Parliament could open the country’s credit market sooner than later, according to lenders lobbyist.

The Kenya Bankers Association (KBA) Chief executive Habil Olaka expressed optimism Thursday that those talks that have been ongoing for a while now could be favorable to all participants taking part in it.

“The biggest headwind met by banks has been the Banking (Amendment) Act, 2016 which introduced interest rate controls and stymied private sector access to credit.

The unintended consequences of the legislation was exemplified by the downward trend in credit to the private sector recorded between 2016 and 2018. We are glad that the Government and regulators remain actively engaged in discussions to review the Act in favor of a system that delivers the most value for all stakeholders,” said Olaka during the launch of 2019 Kenya Banking Industry SHARED VALUE REPORT.

The interest cap regime was endorsed by Members of Parliament of the Banking (Amendment) Act, 2016, introducing interest rate controls that had a chilling effect on the growth of credit.

An assessment by the Central Bank of Kenya found that the rate caps reduced lending to Micro, Small and Mediumsized Enterprises (MSMEs) and consequently contributed to a 1.4 percent decline in the growth of GdP in 2017.

Prior to the caps, the Kenya Bankers Association found that the SME portfolio was growing at a rate of 15 percent per annum, which reduced to 6 percent by September 2016. Bank lending to SMes fell by as much as 5.7 percent or Sh13.8 Billion between August 2016 and April 2017.

At that rate, KBA estimates more than Sh40 Billion has been redirected from enterprise development to Government debt since the rate cap law was enacted.

Due to the challenging operating environment, businesses and households have struggled. As such, gross non-performing loans have recorded a sharp rise from 6.8 percent in 2015 to 12.4 percent in 2018 – although part of the rise can be attributed to new reporting requirements under the International Financial Reporting Standard (IFRS) 9 implemented by banks during the period under review.

Also in the pipeline is plan by Kenya’s Central Bank of Kenya (CBK) that is drafting a monetary policy to make the banking sector more customer friendly, while at the same time admitting the caps which came into force in 2016 had ‘destroyed part of the economy.”

The High Court on March 14, 2019 declared the Banking (Amendment) Act 2016, which capped interest rates unconstitutional – whose effects, the banking regulator effects had both affected the monetary policy’s effectiveness as well as credit flow to micro, small and medium enterprises (MSMEs).

CBK governor Patrick Njoroge said that the Central Bank had already commenced talks with local banks to ensure that they don’t introduce punitive measures in bid to recover money lost because of interest rates capping.

If such plans see the light of the day, credit access for small and micro enterprises would be more available as well as lower the cost of doing business by a bigger margin. The caps have also been opposed by The International Monetary Fund (IMF) which continues to pile pressure on Kenya to remove interest rate controls maintaining they are harming the economy.

 

Private sector credit growth fell to 4.3 per cent in December 2016 compared to more than 17 per cent a year earlier.