President Uhuru Kenyatta has signed into law the Banking (Amendment) Bill, 2015 which limits how much interest banks can charge for loans, despite assertions by top government officials that the legislation would damage access to credit in the economy.
Kenya eliminated interest rate limits in July 1991 but the National Assembly voted for an amendment that would require lenders to peg credit costs at 4 percent or 400 basis points above the benchmark central bank rate. The new law also compels financial institutions to pay interest of a minimum of 70 percent of the Central Bank Rate (CBR) on deposits.
Since receiving this Bill, I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks. These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns.
Banks extended loans at a weighted average rate of 18 percent in June, according to the most recent statistics from the Central Bank of Kenya, compared with 15.7 percent a year earlier. In comparison, CBK has cut the CBR by 1 percentage point to 10.5 percent this year. It also also lowered the Kenya Bankers’ Reference Rate, or KBRR, by 97 basis points.
The President acknowledged that despite Kenya having one of the most efficient and effective financial markets, it also has one of the highest returns-on-equity for banks in the African continent.
Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.
Kenyans took to social media to thank the President for his decisive move.
— Boniface Mwangi (@bonifacemwangi) August 24, 2016
But others were cautious
Varying interest rates upwards is the largest contributor to default. Bank assesses ur ability to pay at 15%. Where do you get money at 22%?
— The Makodingo® (@makodingo) August 24, 2016
— Peter Gacheru (@pgacheru) August 24, 2016
It is currently unclear when exactly these rates will take into effect and whether they will also affect previous loans taken by customers. The Central Bank and Treasury are expected to give guidelines on the implementation of these new rates and also monitor.