Central Bank Prepares for reversal of interest rate cap on loans

Yesterday, the Central Bank of Kenya (CBK) gave a lucid signal that it intends to push for a repeal of the year-old law capping interest rates because of the negative effect it has had on the economy.

However, the CBK governor Patrick Njoroge, warned that commercial banks will have to be more disciplined in the pricing of loans so as not to overcharge borrowers. Speaking to the press after meeting investors, mostly in the equity and fixed income segment, Dr Patrick Njoroge said banks will be handed back a free hand in pricing the cost of loans since the impact has been ‘problematic’.

“What needs to change is the discipline among lending institutions. They cannot go ahead setting interest rates the way they were doing before. And it is our job to deal with them in the context of that market discipline,” he said.
Dr Njoroge said preliminary findings of a joint study with the Treasury on the impact of the rates capping on growth of credit had confirmed a negative impact.

Parliament passed the law late last year, meaning it can only be repealed by the same institution. The Banking (Amendment) Act, 2016, which came into force on September 14 last year, caps loan charges at four percentage points above the Central Bank Rate(CBR), presently standing at 10 per cent, and requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.

“I think it is clear to us that this (rate cap) has been problematic in many ways. What I cannot tell you is the path going forward (and) how this will happen,” Dr Njoroge said.

“All I can tell you is that it is in our interest as a country. It is in our interest as a central bank to work to reverse these measures and go back to a regime where interest rates are freely determined, but in a disciplined environment, Dr Njoroge said.

He added that the central bank was keen on maintaining that disciplined environment.

Barclays Bank of Kenya chief executive Jeremy Awori said review of the rate cap, if agreed, can only happen next year, citing the prolonged electioneering period after the Supreme Court voided the re-election of President Uhuru Kenyatta.

 

Compiled by Collins Gathogo.

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