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Costly loans beckon as rate cap law faces repeal

Steve Umidha @steveumidha

National Treasury Cabinet Secretary Henry Rotich yesterday yielded to calls for a repeal of the law capping interest rate to borrowers.

In his budget speech, Rotich proposed the amendment of the Banking (Amendment) Act, 2016 to give banks and lending institutions freedom to offer more credit to borrowers.

“In order to enhance access to credit and minimise the adverse impact of the interest rate capping on credit growth while strengthening financial access and monetary policy effectiveness, I propose to amend the Banking (Amendment) Act, 2016 by repealing section 33B of the said Act. This is to enable banks and other lenders to provide more credit especially to borrowers they consider riskier,” he said.

The National Assembly passed the Banking (Amendment) Act, 2016 which imposed a maximum rate of interest for all types of credit offered by banks, as well as a minimum rate of interest on interest earning deposit accounts, after pleas from the public on the high cost of credit in August 2016.

But after months into force, the interest rate ceiling attracted wild disapproval for slow growth in credit to the private sector with calls for a repeal of the Act. The aim of the amendment, as was earlier thought, was to expand access to financial services and increase return on savings. However, it failed short of those expectations since banks kept away from borrowers they considered riskier and have priced above the maximum lending rate. 

Similarly, banks have concentrated on either building non-interest earning deposit accounts or reclassifying interest earning deposit accounts to transaction accounts which do not earn interest.

As a result, financial access and economic growth were adversely impacted as a result of the Banking Act.

“In order to sustainably deal with inadequacies in consumer protection and unregulated lending in the financial sector, we have developed a Financial Markets Conduct Bill, 2018 that comprehensively addresses these issues, and does away with piecemeal and fragmented legislation on consumer credit,” said Rotich.

The Bill is also hoped, will addresses the problems of predatory lending and reckless behaviour by credit providers, exploitation of consumers by debt collectors, lending without regard to a borrower’s ability to repay leading to high levels of indebtedness, deceptive pricing and abusive collection techniques.

The draft Financial Markets Conduct Bill, 2018 is currently undergoing stakeholder consultations before Cabinet consideration. Rotich said the government is putting in place a package of reforms aimed at optimising lending to the private sector while at the same time encouraging innovation in the financial sector in Kenya.

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