The enactment of the Banking (Amendment) Act 2015 in September 2016, that capped lending rates at 4.0% above the Central Bank Rate (CBR), and deposit rates at 70.0% of the CBR, came against a backdrop of low trust in the Kenyan banking sector. For starters, the total cost of credit was high at approximately 17.7% in August 2016. However, there was a notable decline to 16.6% on average in FY’2016, after the rate cap was introduced, yet the interest earned on deposits placed in banks remained low, at approximately 7.1%. Secondly, calls for capping interest rates were based on the high profitability in the banking sector because of high spreads between lending rates and deposits rates, which in 2016 was at a high of 9.5% according to the World Bank. As a result, in 2016, the Return on Equity of Kenyan banks stood at 24.5% above the 5-year Sub Saharan Africa (SSA) average of 15.4%. The Return on Assets, on the other hand, stood at 3.1% above the 5-year SSA average of 1.5%, according to the IMF. Lastly, the period was marred with several failures of banks such as Chase Bank Limited, Imperial Bank Limited and Dubai Bank, due to failures in corporate governance. Depositors were rendered helpless and unable to access their deposits in these banks, leading to negative public sentiment that necessitated regulatory action in the sector.
The interest rate cap has had a huge impact on Kenya’s economy since its enactment. The negative effects were a credit crunch for the private sector, reduction of loan accessibility, banks changing their operating models to mitigate the effects of the legislation and the reduced effectiveness of the Monetary Policy. However, it did result in the proliferation of alternative credit markets which was. Good thing.
The Finance Bill, 2019 was signed into law on 7th November, 2019, repealing section 33B of the Banking Act which provided for the capping of interest rates at 4.0% above the Central Bank Rate. With the repeal, we expect to see the following benefits accrue to the economy:
Going forward, we do not expect banks to reprice loans taken during the rate cap era. According to the Kenyan Bankers Association, most banks will not readjust their new pricing on commercial loans since banks have accepted their risk profile as an industry. However, we still recommend that we deal with the outstanding issues, one of which is consumer protection against abuse by banks, since the removal of the cap may set stage for the return of expensive loans that had risen to more than 25.0% before the rate cap. We also need to promote competing alternative funding channels, which will further increase access to credit for borrowers who are unable to access formal loans from banks.
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Egla Kerubo - 1 second ago
Vincent Kemboi - 1 second ago
Felix Owour - 1 second ago
Research Team - 1 second ago