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Kenyan bankers warn cap on interest rates to hit small borrowers

29 July 2016, 17:12

Nairobi (Xinhua) -- Kenyan bankers on Thursday warned that small borrowers will be excluded from accessing credit if President Uhuru Kenyatta assents to the amendments to the Banking Amendment Bill 2015.

The Kenya Bankers Association (KBA) said plans to cap interest rates will force banks to deal with individuals and institutions deemed to have a better credit score, locking out millions of Kenyans.

"The ones who are above the cap will then be released into the market and they will have to get alternative funding from shylocks and loan sharks who are not regulated," KBA chief executive office Habil Olaka said.

The appeal comes after Parliament on Wednesday passed a Bill capping bank interest rates at four percent above the indicative Central Bank Rate (CBR), leaving the decision to President Kenyatta on whether to assent the Bill to law or reject it.

If Kenyatta endorses the Bill, commercial bank lending rates would be capped at 14.5 percent based on the current CBR of 10.5 percent. Some borrowers are currently paying as high as 24 percent for short-to medium-term loans.

That would be significantly different from current average lending rate of 18 percent, as per Central Bank of Kenya (CBK) data.

However, the bankers said capping interest on loans at four percent of the CBR cannot cover the high-risk worthiness associated with most Kenyans which will eventually see many locked out of the formal lending mechanisms hence opt for shylocks.

The commercial banks warned that capping interest rates might weaken the local currency if people result to borrowing loans in foreign currencies whose rates are not capped hence creating another macro-economic problem.

They proposed that a concessionary fund be set up by all banks to cover for persons at the lower end of the economy as opposed to capping interest rates for a free market economy like Kenya.

The CBK has also objected moves to cap interest rates. While agreeing that banks had kept interest rates high for too long, CBK governor Patrick Njoroge argued the move would have a negative ripple effect in credit supply.

"We will continue to pressure them (banks) to lower their commercial lending rates," Njoroge said on Tuesday.

The regulator's monetary policy committee on Monday lowered the Kenya Banks Reference Rate (KBRR) to 8.9 percent in an effort of pressuring banks to lower interest rates.

CBK plans to introduce new pricing tool for interest rates after revealing that the KBRR had failed to deliver the desired outcome.

Olaka stressed that that industry players need to come together to address the underlying challenges that have kept rates high. 

- Xinhua

Tags banking

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