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Professionals want capping law on interest rates retained

Architects accuse Central Bank, IMF and the World Bank of protecting profitability of local subsidiaries of multinational banks by calling for reversal of the law

The president of the Architectural Association of Kenya (AAK), Emma Miloyo, has poured cold water on assertions by financial institutions, among them the Central Bank of Kenya (CBK), International Monetary Fund  (IMF) and the World Bank (WB), that the capping law had slowed down development of the building and construction sectors after lenders slowed credit.

“Lending has increased. The perception in the market that the law has hampered lending is not actual,” Miloyo said at the launch of the organisation’s January – June, 2018 Status of the Built Environment Report at a Nairobi hotel.

According to Cytonn real estate developers, the CBK and Kenya Bankers Association had faulted the legislation initially before IMF and WB stepped in to give a push to the government to repeal the law. Economists at the Bretton Woods institutions have this  year led a growing chorus for review of the Banking (Amendment) Act, 2016.

After months of insisting that the rate cap law signed in August 2016 was here to stay, Kenya has caved in to pressure from IMF to change course. The Financial Times reported that Henry Rotich, the country’s Finance Minister, has agreed to “halve the government’s budget deficit by June 2021 and repeal or reform an 18-month-old cap on bank lending rates”.

This came after an IMF visit to the country where the mission asked the MPs to repeal the rate cap law as one of the conditions in order to extend a $1.5 billion (Sh150 billion) precautionary facility set to expire in March 2018.

In May, Deputy President William Ruto ruled out a review of interest controls law in the near-term, trashing calls by, among others, the IMF and World Bank. “Our position is that the financial institutions we have in Kenya should cut down on their fat; they should cut down on their expenses (and) they should change their business; model,” Ruto said during a media interview on a local television.

The amended law, enforced in September 2016, capped loan charges at four percentage points above the then prevailing 10 per cent CBK rate and put a floor of 70 per cent of the Central Bank Rate on interest paid on term deposits.  The law was meant to help micro- and small-sized enterprises – the drivers of Kenya’s growth – access affordable credit, but has largely been seen as counterproductive.

The cap on interest rates has been blamed for continued slowdown in lending by banks to the private sector which started in 2015, initially due to rising bad loans and tight regulations on bad debts provisions.

According to Chief Executive Officer, Manyatta Capital, a real estate developer, Francis Kihanya, banks have been keen on short-term profitability and maintaining the status quo where they have a free hand on interest rate charged.  “Banks would want to have us believe that the Kenyan economy is unique and work differently from the others in rest of the world. That’s not true!” he says.

He says the biggest beneficiaries of this tug-of-war have been the developers, land-selling companies and saccos as they will continue to take advantage of a situation where the banks made it almost impossible for individuals to access mortgage finance. 

Miloyo said the AAK report has established lending had increased and alluded that debate of a negative impact was a fallacy, a position, she said, backed by Kenya National Bureau of Statistics (KNBS).  “The report indicates that during the period, construction and real estate sectors have been vibrant because of renewed and an invigorated real estate sector made so by the Big Four agenda on housing. It means this sector is getting credit from financial institutions,” she said. 

Asserting that lending is on course, Miloyo pointed out that commitment by the government on land swaps entailing the exchange of public and private land between the government and developers. This is enabling developers to access land that would otherwise have been tied down.

This is besides the Public Private Partnerships agreements between the State and the private sector to facilitate development and the creation of the Kenyan Mortgage Refinancing Company — an initiative aimed at enhancing mortgage affordability and facilitating long-term loans at attractive rates. 

Speaking at the same function, visiting president of the International Union of Architects (UIA) Thomas Vonier said housing in most cities in the developing world is defined by great opulence in contrast to great poverty. He advised architects and developers to embrace modern construction technology and local building materials.

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