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On 14th September 2016, the interest rate cap law came into effect, aiming at making credit affordable to the ‘common man’. The law puts a ceiling on the lending rate by banks and other financial institutions to at most 4% above the Central Bank of Kenya (CBK) base rate, known as the Central Bank Rate (CBR).
This was done because of the high cost of borrowing which deterred access to credit by a large section of the population and persistently high-interest rate spreads. In the early 1990s, Kenya’s financial sector was liberalized to allow market-driven interest rates. Thus, the financial sector liberalization resulted in narrow interest rate spreads through competition. Despite this, interest rate spreads in Kenya were way above 10% even in the post-liberalization period.The banking sector in Kenya is ‘oligopolistic’ in nature. With 44 licensed commercial banks, a significant share of the market is dominated by five (6) large banks. The few large banks are perceived to be stable and account for over 49.9% of the market share (deposits and loans). Therefore, they can attract large deposits at low deposit rates and many loan applications at higher rates, resulting in higher spreads.
Such market ‘inefficiencies‘may warrant government intervention, which can be direct by being a player in the market or indirect through legislation. This is meant to protect consumers in most cases and to ensure macroeconomic stability. Consequently, the government intervened to correct the inefficiencies in the financial sector by making into law, the Bill that caps interest rates.
The law has since been criticized by many in that the cap has failed to lower the cost of credit and increase lending to the private sector.
On March 14th, 2019, a 3-Judge High Court Bench ruled that capping of interest rates under Banking Act Sec 32B is unconstitutional. The implementation was, however, suspended for 12 months to allow regulators to put in place appropriate mechanisms.
According to Mr. Joshua Oigara, the chairman of Kenya Bankers Association in an interview with Business Daily said Kenya Banker Association understand the importance of a reduction in pricing of loans to SME ’s. To do so there needs to be a better credit scoring model, that is a risk-based pricing model so that a good customer with a better record can get cheaper credit and vice versa.
‘We believe that natural pricing of credit will come down, so we are not anticipating that we would go back to high credit pricing for the public. From the first day, banks have always said that we should address the real reason why the price of credit remains high, and that is what we want to continue to do. Even without the rate cap, I think credit would on average still be in the 13 to 15 percent range. The macroeconomic situation right now where we have a stable currency, inflation, and treasuries yields are low does not call for banks to go and raise interest rates”, said Mr. Joshua
We foresee the interest rates going up as most banks will want to increase their loan books and increase their profit share. To do this, they will want to attract as many deposits as possible to lend out. This, of course, will be dependent on what is implemented by the regulators.
