(Ecofin Agency) - The Kenyan parliament approved the repeal of the law which over the past three years limited interest rates on bank loans to only 4% above the central bank's benchmark rate. The question now is: does the new measure satisfy all financial actors? Let’s find out!
In this battle, banks, especially large banks such as Equity Group and Kenya Commercial Bank, are seen as the big winners. Along with other financial institutions of the same category, they have always fought hard against the interest capping law, from its conception to its implementation. They say that limiting what lenders can charge on loans, taking into account the risk they take, is not a fair policy.
When the law was still in force, banks and financial institutions operating in the country significantly reduced their portfolio of credit to the economy. And investors who invested in bank shares had lost any hope that income would increase in a highly competitive banking market.
On the Nairobi Securities Exchange, banks now rank high among companies whose stocks have risen sharply over the past month. This period coincides with the moment when President Uhuru Kenyatta asked the Parliament to review the law on rate limits.
There may have been several reasons for Uhuru Kenyata to advocate for the law change. The first is that the Kenyan government is uncomfortable with both its internal and external debt, while it must meet many social expectations. The Kenyan population has grown by 26% over the last decade, whereas tax revenues have not grown the same way. With the limitation of interest rates, companies, mainly mid-cap ones, no longer had access to credit and therefore could no longer support their activities and pay taxes.
Second, banks (nearly 40 in Kenya) are major contributors to corporate tax. Kenyan authorities believe that if banks can resume financial intermediation activity, they will have more income and pay more taxes.
On the other hand, the losers are the micro-finance institutions who were not subject to the interest limitation law. Motivated by lower interest rates, people have contracted loans with these institutions and may find it even more difficult to repay. As a consequence, defaults are likely to accumulate. Indeed, it is banks’ reluctance to grant credit, particularly to risky profiles, that had paved the way for a range of small microfinance structures and payment companies offering “nano credit” services.
IMF experts suggested that that abolishing the law on rate limitation is not enough and further accompanying measures were needed. According to Abebe Aemro Selassie, Director of the IMF’s African Department, a good choice would have been to induce more competition among banks on the credit segment. In Nigeria, for example, the Central Bank banned commercial banks from investing in the short-term government securities market.