May 30th 2017

Business / Economy

Uhuru signs interest rates Bill into law, setting banks up for a bruising battle with Govt

The signing of the Bill was only the first step in an expected bruising battle between the public and banks. While the law's implementation will start immediately, it will take at least a few months before the Central Bank comes up with regulations to govern the broad principles in the Act.

By Phillip MuleeWednesday, 24 Aug 2016 18:04 EAT

President Uhuru Kenyatta signs the Bill at State House, Nairobi, early today. (Photo: the president's Facebook page)

President Uhuru Kenyatta has confounded friends and foes by signing the Banking (Amendment) Bill 2015 to regulate interest rates. In signing the law, Uhuru bowed to public pressure that had been building up for weeks since the Bill was passed by the National Assembly.

But he also answered the call of his own political allies who had placed the president's decision on the Bill as a litmus test of his commitment to public interest. The Bill, which was strongly opposed by the banking industry, was moved by a member of the President's party, Jude Njomo of Kiambu.

The new law limits the interest rates charged by banks to a maximum of four percentage points above the Central Bank Rate. With CBR currently at 10.5 per cent, banks cannot charge higher than 14.5 per cent as interest on credit. Interest rates have averaged 18 percent in 2016.

The signing of the bill into law brings weeks of anxiety to an end with legislators and banks alike throwing arguments and counter arguments as to the pros and cons of interest rate controls. The new law also prescribes penalties for bank officials who violate the requirement.

"Upon weighing carefully all these considerations, on balance, I have assented to the Bill as presented to me. We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms”, the president said, according to a statement from State House.

In signing the Bill, the president also diverged from the judgement of his official advisers on the economy who had weighed in on the side of banks during the public debate on the Bill before and after its passage by the National Assembly. The National Treasury, the Central Bank of Kenya and the banks have all been opposed to the capping of interest rates arguing it would be counterproductive to the economy.

The signing of the Bill was only the first step of what is expected to be a bruising battle ahead between the public and banks. While the law's implementation will start immediately, it will take at least a few months before the Central Bank comes up with regulations to govern the broad principles in the Act.

The president said after receiving the Bill, he had consulted widely and established 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, he added.

The president noted that this is the third time that the National Assembly is attempting to reduce interest rates to affordable levels. The previous two instances, he said dialogue and promises of change prevailed and banks avoided the introduction of these caps.

“In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates”, he said.

Noting that despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent, he noted 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.

“We will closely monitor these difficulties, particularly as they relate to the most vulnerable segments of our population.

“Whilst doing so, my Government will also accelerate other reform measures necessary to reduce the cost of credit and thereby create the opportunities that will move our economy to greater prosperity”, he said.

Mr Kenyatta however recognized that banks have done much in the last decade in terms of innovation and promoting financial inclusion and looked to their doing more in that direction. He reiterated the government’s commitment to free market policies in driving sustainable economic growth.

On July 28, the National Assembly passed the Banking (Amendment) Bill, 2015. The Bill intends to regulate interest rates that are applicable to banks’ loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits.

Banks have at one point said that with interest rate caps, banks would be forced to turn away perceived risky borrowers, locking out millions from the credit market.

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