Changes to Kenya’s banking law that will cap commercial lending rates risks driving borrowers to informal financial services, increasing credit inefficiency and undermining transmission of monetary policy, the central bank and an industry body said.
Kenya’s parliament passed the amendments to the banking law on Wednesday at a third and final reading. The changes setting maximum lending rates at 400 basis points above the central bank’s benchmark rate, which now stands at 10.50 percent.
It also sets a minimum rate for bank deposits of 70 percent of the central bank’s benchmark rate [nL8N1AD5IM].
Jude Njomo, the lawmaker who sponsored the amendments, told Reuters they would get a final nod from parliament on Thursday before being sent to President Uhuru Kenyatta to sign into law.
The central bank said in a statement that while it appreciated efforts aimed at lowering lending rates, it had reservations on putting caps on them.
“We continue to express concern on the adverse consequences of capping interest rates. This would include, inefficiencies in the credit market, credit rationing, promotion of informal lending channels, and undermining the effectiveness of monetary policy transmission,” the bank said.
The bank has in the past urged commercial banks to lower rates, but does not set a cap and said it would continue to work with industry players, government and lawmakers to find a solution to lower rates.
The changes are meant to address complaints that commercial banks often fail to lower their own lending rates even when the central bank cuts its benchmark rate.
Habil Olaka, chief executive officer of the Kenya Bankers Association, said the industry body opposed both amendments, as it would also damage small businesses.
“The borrowers whose risk profile is … higher than what is legislated will have to get credit elsewhere. These borrowers will have to access the informal lending sector – the Shylocks and the other unregulated lenders,” he told a news conference.
Businesses often complain that high commercial lending rates, which can reach 18 percent or more, hobble corporate investment. Individuals say the high rates put borrowing for home loans, for example, out of reach of many.
John Gachora, KBA’s vice chairman, said there was also a risk that the lending rate caps would lead to some borrowers resorting to foreign currency-denominated loans, which could lead to a weakening of the shilling.
“That weakens the shilling. And historically it has been proven, every country that has a cap on interest rates eventually has to have a currency control law as well,” he said.
The changes propose a fine of 1 million shillings ($9,876.54) and a year in jail for CEOs of commercial banks that fail to comply.