The invasion by unregulated digital mobile lenders that charge exorbitant monthly interest rates is among the reasons that President Uhuru Kenyatta cited when he asked lawmakers remove the cap on commercial lending rates in his memo to Parliament.
President Kenyatta told the National Assembly through the memo that the State control of lending rates had led to a credit squeeze in mainstream banking, pushing individuals and small businesses into the hands of loan sharks who charge steep interest on short-term loans.
The cap reduced private sector credit growth as commercial banks turned their banks on millions of low-income customers as well as small and medium-sized businesses deemed too risky to lend to. In turn, the credit crunch triggered an appetite for digital loans, leading tens of unregulated microlenders to invade Kenya’s credit market in response to the growth in demand for quick loans. Their proliferation has saddled borrowers with high interest rates, which rise up to 520 percent when annualised, leading to mounting defaults and an ever ballooning number of defaulters who have been adversely listed with Credit Reference Bureaus (CRBs).
“The capping of interest rates has not addressed the intended objective, particularly in expanding credit access,” Mr Kenyatta said in his note to Parliament.
“Shylocks and other unregulated lenders have taken advantage of the effects of capping to lend to desperate citizens at exorbitant rates in a predatory manner, compounding the already existing problem.” Mr Kenyatta now wants MPs to repeal the law that introduced the cap on commercial lending rates before he can approve the 2019 Finance Bill — which spells out how taxes that fund the Budget will be levied. His move is the latest in a running dispute over the rates cap, which Mr Kenyatta and banking executives say has been weakening to the economy because it curtails lending.
In 2016, the government set the rate that banks can charge customers at four percentage points above the Central Bank’s benchmark — currently nine percent — in an attempt to make loans affordable. The law provides that banks’ lending rates be capped at 13 percent. The Central Bank has generally maintained its benchmark rate, meaning tht banks could not charge more for loans.
Last month, MPs rejected a June request by the Treasury to remove the rate cap. The MPs said lenders had not proven they could be trusted to lower rates without pressure. The Treasury move was the second attempt by the government to repeal the cap after a similar attempt was blocked by lawmakers last year.
Bank shares — which took a hit from the interest rate restriction — rallied at the Nairobi bourse after the latest development. On Thursday, Equity was up 4.44 percent, Cooperative Bank (3.32 percent) and KCB (2.9 percent).
“The rally in banks stocks was expected in light of the President’s action,” said Martin Kirimi, an analyst at Standard Investment Bank (SIB). “But I wouldn’t pop the champagne just yet. There is a lot of interest in the matter.”
He noted that MPs have loans and will suffer directly from the removal of the rate cap.
Besides the credit crunch, Mr Kenyatta says the rate cap weakened the Central Bank’s hand in dictating monetary policy and also contributed to reduced economic activity.
Credit-starved businesses lay off workers and real estate developers found it difficult to sell homes to a credit-short market. Some consumers also opted for the expensive digital mobile loans that have seen the Treasury and CBK scramble to find ways of controlling the loansharks and other unregulated lenders. The current legal regime of the digital lenders, which is outside the direct remit of the Central Bank, allows providers, both banks and others, to sidestep the rate cap.
Market leader M-Shwari, Kenya’s first savings and loans product introduced by Safaricom and Commercial Bank of Africa in 2012, charges a “facilitation fee” of 7.5 percent on credit regardless of its duration, pushing its annualised loan rate to 395 percent. Tala and Branch, other top players in the mobile digital lending market, offer annualised interest rates of 152.4 percent and 132 percent respectively.
Lawmakers have the option of removing the cap from the bill or overruling the President if two thirds of the 349 members vote to override his position, said Aden Duale, the National Assembly majority leader. To overrule the President, at least 233 MPs must vote to reject his memo, a difficult task under the current political alignment given the rapprochement between the President and ODM leader Raila Odinga.