President Uhuru Kenyatta has hit banks below the belt, signing into law the bill that limits the amount of interest rates financial institutions can charge on loans. The president went against emerging speculation that being an interested businessman in banking through Commercial Bank of Africa (CBA), which is owned by the Kenyatta family, he would have favoured the banks and rejected the law.
“…Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks,” he said in a statement released soon after assenting to the bill. “These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns.”
Analysts will be keen to interpret the move as selfless or see it as shooting himself in the foot, but it was inevitable as it is a populist move that he expects to earn him admiration ahead of the elections next year. But of importance is the impact it’s going to have on banks, which thrive on selling credit expensively to drive their profits.
Credit is the main business for banks, boosted by other commissions and charges as well as forex. Banks are expected to feel the heat, as revenues will fall as interest has been capped at only 4 per cent above the benchmark Central Bank Rate.
It may seem a positive move that should stimulate uptake of credit, but it will more likely slow down credit from the banking side as banks would be unwilling to lend to segments like SMEs perceived to be high risk at low interest rates. They are likely to find new ways of squeezing more from their customers through charges.
STATEMENT BY H.E. UHURU KENYATTA, PRESIDENT OF THE REPUBLIC OF KENYA AND COMMANDER-IN-CHIEF OF THE DEFENCE FORCES, ON THE BANKING (AMENDMENT) ACT 2015
On July 28, 2016, the National Assembly passed the Banking (Amendment) Bill, 2015. The Bill intends to regulate interest rates that are applicable to banks’ loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits.
In line with the Constitution of Kenya the Bill was presented to me, for appropriate action as required by law.
Since receiving this Bill, 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. These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns.
This is the third time that the National Assembly is attempting to reduce interest rates to affordable levels. In the previous two instances, dialogue and promises of change prevailed and banks avoided the introduction of these caps. In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates.
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Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.
Upon weighing carefully all these considerations, on balance, I have assented to the Bill as presented to me. We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms.
We will closely monitor these difficulties, particularly as they relate to the most vulnerable segments of our population. Whilst doing so, my Government will also accelerate other reform measures necessary to reduce the cost of credit and thereby create the opportunities that will move our economy to greater prosperity.
We recognize that banks have done much in the last decade in terms of innovation and promoting financial inclusion and look to their doing more in that direction.
We also reiterate our commitment to free market policies in driving sustainable economic growth, to which we owe much of our success.
Uhuru Kenyatta, CGH
President of the Republic of Kenya
Wednesday 24th August 2016
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