Banks unhappy, but will comply with law capping interest rates

August 24, 2016
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KBA says there is little evidence from other countries that such interventions have helped the majority of citizens, and in a number of countries such laws have been reversed to promote financial inclusion/FILE
KBA says there is little evidence from other countries that such interventions have helped the majority of citizens, and in a number of countries such laws have been reversed to promote financial inclusion/FILE

, NAIROBI, Kenya, Aug 24 – The Kenya Bankers Association (KBA) says banks will comply with the new law to cap interest rates assented by President Uhuru Kenyatta on Wednesday.

The association however criticised the move, arguing that the law will undermine the banking sector’s business.

KBA says there is little evidence from other countries that such interventions have helped the majority of citizens, and in a number of countries such laws have been reversed to promote financial inclusion.

The new law will see banks charge interest rates at 4 percent above the Central Bank’s lending rate.

The current CBK lending rate stands at 10.5 percent.

“We welcome the spirit of today’s decision by His Excellency President Uhuru Kenyatta. We however do not feel that an arbitrary rate cap is in the best interests of the majority of people and businesses that this law seeks to support,” the association said in a statement.

When assenting to the law, President Uhuru Kenyatta said Kenyans were disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks.

“This is the third time that the National Assembly is attempting to reduce interest rates to affordable levels. In the previous two instances, 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,” the President added.

Earlier this month, KBA presented a Memorandum of Understanding to the Central Bank of Kenya intended to address the high cost of borrowing locally.

The document covered immediate steps and other actions banks have committed to do to lower interest rates in the country while still retaining free market principles.

Among the steps included reducing interest rates and notifying customers immediately and cancellation of account closing charges.

Banks also committed to allocate Sh30 billion to enhance financial access for SMEs from which Sh10 billion shall be dedicated to women and youth-owned micro-enterprises.

To further incentivize the offer, lending rates of this fund will be concessionary and will not exceed 14.5 percent.

Analysts have also opposed the move citing that it will take away CBK’s efforts of trying to cap the rates in a manner that will result into bigger problems to the industry.

According to Standard Investment Bank Analyst Faith Mwangi says while the law’s intentions are good, it might mean that banks will get to select who they lend to, which could potentially lock out individuals and SMEs from accessing credit as they are viewed to have a higher risk of defaulting.

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