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Experts: Expensive loans a blessing in disguise for SMEs

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Banks are set to reap big after the High Court on Thursday ruled that the law capping interest rates is unconstitutional.

The High Court sitting in Nairobi on Thursday dealt a blow to Kiambu Town lawmaker Jude Njomo’s efforts to rein in banks that were advancing loans to the public at rates which he declared as ‘extortionist’ before he successfully pushed through the Banking (Amendment) Act 2016.

The law caps interest rates at 4% above the Central Bank’s base lending rate.

A three judge bench declared certain sections of the law unconstitutional.

“The court has found provisions of sections 33 B (1) and (2) of the Banking Act to be vague, imprecise, ambiguous and indefinite… The court therefore declares the sections 33B (1) and (2) of the Banking Act to be null and void,” ruled the three judge bench.

However, the court suspended the implementation of the rate cap for one year to give parliament time to correct the anomalies.

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Njomo sponsored the bill after banks refused to heed to the government’s call to lower their lending rates which had skyrocketed as high as 25% in 2011.

The legislator alleged that agents of the country’s top commercial banks had tried to prevail upon him to drop the bill before it was tabled at the floor of the National Assembly in 2016.

Merits and Demerits

Since the law was effected, it has been a bone of contention between bankers, economists and politicians.

In April 2018, Treasury Cabinet Secretary Henry Rotich proposed to repeal the law but MPs flatly rejected his attempts.

President Uhuru Kenyatta signed the bill into law in August 2016, saying that he was heeding to the public’s call.

“I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks,” the President said.

Cytonn Investments CEO Edwin Dande welcomed the High Court’s ruling, noting that there should be free movement of goods and services in a market.

“The law stiffed SMEs’ growth. I think the ruling will do a lot of good,” Dande said in a phone interview with Business Today.

Former Kitutu Masaba MP Timothy Bosire, who was a member of the National Assembly Finance, Planning and Trade Committee, said stakeholders should go for a balancing act

“The matter should be handled with moderation,” said Bosire in an interview with Business Today “From a populist point of view, the law was a good thing but economically, there is need for minimal control as the market cannot be left to be entirely free. Having said that, I believe that stakeholder engagement is key in that there should be a balance between market forces and regulation,” he said.

He said even if the cap is removed, SMEs are unlikely to fully benefit since banks will go for high interest rates that would only benefit the rich such as power barons, giving the example of what happened in the 1990s when they hit 30% at one time.

“A free market regime cannot work here because we don’t have strong institutions. It only works well in countries such as the US and European nations. What we need is fairly crafted regulation as that is what will deliver better for the market,” said Bosire.

On the court’s interpretation that CBK does not have powers to set rate caps as it is not part of monetary policy, the former MP insisted it has an express mandate on regulations to govern the banking sector. He added Parliament also had the mandate to legislate.

However, he said due to the various interests at play, the Treasury and CBK should liaise with Parliament and other stakeholders such as consumer watchdogs to find the best way forward.

Gatundu South MP Moses Kuria is one of the few MPs who were against the law.

“History has shown us that once you liberalise markets. Trying to come back creates far much bigger problems than the one you are trying to solve,” said Kuria during a debate on the law at the Strathmore University Business School on July 3, 2018.

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Speaking during a consultative meeting on January 29, 2019, Kenya Private Sector Alliance (KEPSA) Vice Chairperson Tom Omariba questioned the need for the law since it had starved Small and Medium Enterprises (SMEs) access to much needed credit.

“What is the point of having affordable credit if we can’t access it?”  posed Omariba.

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