NAIROBI, Kenya, Aug 25 – Credit rationing is expected to hit the banking sector once the new law to cap interest rates takes effect.
Kenya Bankers Association Chief Executive Habil Olaka says banks will be forced to prioritise low risk borrowers.
A low risk borrower is one who is likely to repay their loans in full and on time like cooperates and the government among others.
According to Olaka, the new law signed by President Uhuru Kenyatta on Wednesday is detrimental to the economy as many will be locked out from lending.
“High risk borrowers will now face more obstacles in getting loans. If your risk is higher than the 4 percent cap that is now in the law, it will be hard for a bank to give you a loan, most small and micro finance companies fall in this category and they are the backbone of the economy,” he observed.
Borrowers with bad credit, no credit or have low income are considered to be high risk.
“Lending decisions will now be based on the risk appetite. A bank will not take a risk that is above the 4 percent cap that has been put under the law; banks will now be forced to re-look their business models and innovate,” Olaka explained.
He says the move will also see a rise in informal lending channels as borrowers locked out at banks seek alternative solutions.
The new law is unclear on whether it will affect loans procured before President Kenyatta’s assent.
“Current loans will now stay as they are, we are waiting for the law to be gazette, the government has not yet issued details of how the law will be implemented,” he added.
The signing into law the Banking (Amendment) Bill, 2015, could usher in fundamental changes in the financial sector.
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.
President Kenyatta, in a statement explaining his decision to sign the bill into law, said Kenyans had expressed frustration with the lack of sensitivity by banks.
“These frustrations are centred around the cost of credit and the applicable interest rates on their hard-earned deposits. I share these concerns,” said Kenyatta.
He noted previous attempts by Parliament to introduce interest rates to affordable levels caved in to the sector’s promise of self-regulation but banks failed to live up to the promise.