President Uhuru Kenyatta is likely to veto the Bill capping interest rates, State House sources yesterday told the Star.
The Banking Amendment Bill, 2015, has created a firestorm of controversy pitting commercial banks against small and ordinary borrowers. It's an emotional issue and a sensitive decision since the prevailing average is 18.2 per cent.
Rejecting the Bill will give the opposition ammunition against the government, which promised to lower interest rates in its 2013 pre-election manifesto.
However, Uhuru is expected to side with key financial advisers opposing the limits, including Central Bank of Kenya Governor Patrick Njoroge and Treasury CS Henry Rotich.
They say if the Bill becomes law, banks will focus on lending to blue-chip companies, locking out average borrowers.
"The President believes key ongoing reforms in the banking sector will bring down the cost of borrowing over time. The government feels we need to deal with the root cause of why interest rates are where they are," one source within the Presidency told the Star. Several sources were interviewed.
Uhuru has been under popular, parliamentary and opposition pressure to sign the Bill sponsored by Kiambu Town MP Jude Njomo. It was passed on July 27.
The Bill would cap interest interest at 400 basis points above the 10.5 per cent Central Bank Rate and deposit rates at a minimum of 70 per cent of the Central Bank Rate.
The Star learnt Uhuru will list numerous reasons why the Bill should not become law. He is to draw heavily on recent comments by Njoroge and Rotich.
One reason against signing is that the proposed cap only covers commercial banks, leaving out many Kenyans who borrow from other sources.
The thinking within the Executive is that capping fails to cover those borrowing from micro-finance lenders and mobile platforms such as Safaricom's Mshwari.
"The President also feels we should strike a balance between a majority of Kenyans who cannot borrow from banks and the middle-class using their salaries to secure loans," another State House source said.
The Presidency is said to believe the middle class is a small segment of the economy and eventually can repay bank loans, benefitting from lower interest rates.
"There is also concern banks could starve the market of credit and offer loans when need be. This could adversely affect economic growth," a presidency source said.
The argument, the Star was told, is that capping interest rates will be ineffective if credit is not available, leaving those who want loans vulnerable.
This argument against capping rates was made by CBK Governor Njoroge in newspaper opinion pieces last week.
"Reinstating interest rate caps will lead to emergence of credit rationing and the unavailability of credit to a wide segment of the population — particularly SMEs, new and small borrowers — with immediate adverse consequences on job creation and poverty," Njoroge said.
The CBK has also argued capping interest rates will have overwhelmingly negative consequences on businesses and consumers.
"This is confirmed by experiences from other countries, including in the EAC region, which have all abandoned interest rate caps, and Kenya’s own experience leading to elimination of interest rate controls in July 1991," Njoroge wrote.
Banking reforms Uhuru is relying on include those proposed by CBK to ensure information from Credit Reference Bureaus is strengthened, allowing banks to distinguish between risky and reliable borrowers.
The CBK has also proposed establishing a collateral registry and reforming the Kenya Banks' Reference Rate.
KBRR is a benchmark rate prescribed by the CBK for pricing all interest rate loans or credit facilities.
According to Njoroge, transparency about bank products and pricing is being enhanced, including implementing the Annual Percentage Rate reflecting the actual cost of borrowing.
Last week, banks made a public commitment to immediately cut interest rates in a last-ditch move to persuade Uhuru to veto the Bill.
Through the Kenya Bankers Association, lenders promised to reduce interest rates by at least 97 basis points.
That commitment is contained in a seven-point MoU by the banks to gradually cut interest rates from the prevailing average of 18.2 per cent.
This would conform with the hitherto largely ineffective Kenya Banks Reference Rate — the industry-wide base rate effected in July 2014 and reviewed every six months — which was slashed to 8.90 from 9.87 per cent by the CBK’s Monetary Policy Committee on July 25.
Cord leader Raila Odinga and others have been pressuring the President to immediately sign the Bill.
On Sunday, the ODM chief said assenting to the Bill will save millions of Kenyans suffering at the hands of a barely controlled banking regime.
Yesterday, Cord MPs insisted Uhuru must sign the Bill. Awendo MP Jared Oipyo said it serves the interests of the majority of Kenyans.
"Interest rates are weird and outright thuggery. Regulation of interest rates could have been done 60 years ago. We are trying to regulate interest rates in the interests of our people who have been exploited. If the President does not sign the Bill, we will take him to court. He should also choose to safeguard the interests of the people or choose to be a businessman," Opiyo said.
Kiminini MP Chris Wamalwa said Uhuru should sign the Bill to save Kenyans from bank exploitation. "If he is patriotic enough, he should sign. It will help many parents access loans and educate their children," he said.
However, TNA chairman Johnson Sakaja said the opposition will use exploit anything. including the President's veto, to gain political mileage.
Although it would be noble to sign, rejection will be based on sound reasons and Kenya will not be the first country to refuse to cap rates, he said.
"Signing or not signing does not go against the Jubilee manifesto because it does not talk about gaping interest rates but about measures to reduce them, such as reducing government borrowing from banks. The President is acting in line with the manifesto," Sakaja said.