New credit law to help small firms


Workers, households and small businesses will be the biggest gainers under new measures proposed by Members of Parliament aimed at increasing access to credit.

The measures by the Budget Committee aim to address a gap in the interest rate law that made loans available but hindered lending to individuals and small businesses who banks consider risky. This has seen banks lend more to government, beating the intentions of the law.

Kitui Central MP Makali Mulu, a member of the Budget Committee, said the committee would propose removal of the minimum limit on rates paid for deposits, which would give banks and the Monetary Policy Committee more space to direct financial markets.

“We have locked out lending to small borrowers. This has stifled economic growth as borrowing is left to big institutions. Banks prefer lending to the government,” said Mr Mulu.

Removal of the minimum interest rate for deposits means three things. The first is that big institutional investors like pension funds, treasuries of top-tier companies, savings and credit societies and high-net-worth individuals will be getting less return on their deposits.

Small savers whose accounts were converted to transaction accounts by banks in the wake of the interest rate caps are unlikely to be affected.

Secondly, bank margins will increase, depending on a lender’s ability to mobilise cheap deposits from individuals, institutions and international lines of credit. The third is the intended end-game of the changes, increasing access to loans by micro and small scale enterprises and households.

Asked why MPs’ feelings on the matter have changed since the Bill’s approval in 2016, he said: “People have seen the reality now. Feelings took over during the debate. Banks are also feeling the effects,” he said.

The committee’s proposal for a review falls short of the CBK and the International Monetary Fund’s call for an outright repeal. “There has been slow movement of credit to the private sector since the introduction of the caps,” Nikko Hobdari, senior economist at the IMF told MPs.

With the interest rate caps, the average deposit rate increased from below 6.4 per cent in August 2016 to seven per cent in December last year, while the average lending rate fell from 17.7 per cent to 13.8 per cent over the period.

Despite this, growth in private sector credit slowed from 4.1 per cent to 2.4 per cent as of October last year, with agriculture, manufacturing and business services, the main creators of jobs, the most affected.

In contrast, lending to government rose by 31 per cent. Mr Jude Njomo, the MP who moved the interest rate law, said it remained to be seen whether leaving deposit rates to market forces and reduction, if any, in government borrowing would increase access to loans.

“Reducing domestic borrowing would be some light at the end of the tunnel. The banks would still do all within their means to charge as high an interest rate as they possibly could. The banks may never be trusted to self-regulate,” he said.

Mr Njomo, however, accused banks of playing games with access to credit. “The credit squeeze to SMEs is a deliberate effort by commercial banks to sabotage the economy so that the government may influence Parliament to remove the interest rate caps,” Mr Njomo said.

The interest caps law requires banks to pay depositors and charge borrowers interest rates pegged on the Central Bank Rate (CBR); the rate the Central Bank charges commercial banks that are in distress.

With CBR at 10 per cent since September 2016 when the interest rate caps came into effect, money in deposit accounts has been receiving seven per cent in interest per year while borrowers are charged a maximum of 14 per cent per year.

The interest rate cap law stipulates that banks pay depositors not less than 70 per cent of the CBR and charge not more than four percentage points above the CBR for loans.

Treasury last week promised the IMF that the interest rate caps would be removed in the next budget to allow the Central Bank more flexibility in directing the economy.

With the deposit rate floor and lending rate ceiling, changes in the CBR were not effective as they moved both the supply and demand side of money equally.

Treasury had as late as last month been supportive of the caps before yielding to pressure from the IMF, with which it is renegotiating a $1.5 billion overdraft to cushion the country from external shocks.

Treasury principal secretary Kamau Thugge said it was preparing a consumer protection law to replace administrative caps on the cost of money. Such a law — The Kenya Consumer Protection Act 2012 — already exists and may just require a tweak to accommodate the financial sector.

The Budget Office of Parliament, which breaks down policy matters for legislators on critical issues like the Budget, advised last month that a review of the interest rate regulation should ensure the controls are completely delinked from the CBR. It said the caps had benefited the government more than the private sector.