Borrowers will still be protected from exploitation even if rate cap is repealed – KBAAugust 21, 2019
NAIROBI, Kenya, Aug 21- Kenya Bankers Association (KBA) now says the Banking Sector Charter will protect borrowers in case the interest rate cap is repealed.
KBA Chief Executive Habil Olaka says the Central Bank issued charter will ensure banks do not exploit credit borrowers should the country return to market driven interest rates.
“We have controls in place such as the Banking Sector Charter that was provided by the Central Bank of Kenya, which tries to control the conduct of banks towards consumers, in an uncapped environment,” he said.
CBK issued the Charter last year to facilitate a market-driven transformation, that would see the Kenyan financial sector and populace work towards reversing the rate cap and go back to a regime with freely determined and market-driven interest rates, but in a disciplined environment.
This is after the introduction of the Interest rates cap in 2016 failed to tame the high costs of credit, prompting the public’s call for interest rate capping.
“The Bankers are supporting what was earlier suggested by the National Treasury on the Finance Bill since the caps have not worked, and we are not going to increase the borrowing rates,” Olaka adds.
The interest rate cap under the Banking Act amendment that were introduced in 2016 limiting borrowing rates to 4 percentage above the Central Bank Rate was supposed to inject a new wave of capital through affordable loans.
The amendment was in response to concerns raised by the public regarding the high cost of credit in the country, which was perceived to have locked out a large segment of population from the credit market.
The high cost of credit was as a result of structural rigidities and failures in the market for bank credit.
Thus, the interest caps sought to address the market failure by limiting the discretion of banks to raise interest rates on loans at will, with a view to enhancing the affordability of credit and enhancing transparency.
In turn, the capping of rates, according to Cytonn Investments, locked out SME’s and retail borrowers from accessing credit, strained the smaller banks, who have had to mobilize expensive funds and can only lend out within the stipulated margins, and continues to weigh down on private sector credit growth.
In March, the High court ruled in favor of the banks’ request to have the cap repelled citing the interest cap law to be unconstitutional.
Olaka and KBA Chairman Joshua Oigara, also the Chief Executive Officer KCB Bank, are set to meet Parliament to defend the cancellation of the interest rate cap.