President Uhuru Kenyatta. FILE PHOTO | NMG The invasion by unregulated digital mobile lenders that charge exorbitant monthly interest rates is among the reasons that President Uhuru Kenyatta cited when he asked lawmakers remove the cap on commercial lending rates in his memo to Parliament.
President Kenyatta told the National Assembly through the memo that the State control of lending rates had led to a credit squeeze in mainstream banking, pushing individuals and small businesses into the hands of loan sharks who charge steep interest on short-term loans.
The cap reduced private sector credit growth as commercial banks turned their banks on millions of low-income customers as well as small and medium-sized businesses deemed too risky to lend to. In turn, the credit crunch triggered an appetite for digital loans, leading tens of unregulated microlenders to invade Kenya’s credit market in response to the growth in demand for quick loans. Their proliferation has saddled borrowers with high interest rates, which rise up to 520 percent when annualised, leading to mounting defaults and an ever ballooning number of defaulters who have been adversely listed with Credit Reference Bureaus (CRBs).
“The capping of interest rates has not addressed the intended objective, particularly in expanding credit access,” Mr Kenyatta said in his note to Parliament.
“Shylocks and other unregulated lenders have taken advantage of the effects of capping to lend to desperate citizens at exorbitant rates in a predatory manner, compounding the already existing problem.” Mr Kenyatta now wants MPs to repeal the law that introduced the cap on commercial lending rates before he can approve the 2019 Finance Bill — which spells out how taxes that fund the Budget will be levied. His move is the latest in a running dispute over the rates cap, which Mr Kenyatta and banking executives say has been weakening to the economy because it curtails lending.
In 2016, the government set the rate that banks can charge customers at four percentage points above the Central Bank’s benchmark — currently nine percent — in an attempt to make loans affordable. The law provides that banks’ lending rates be capped at 13 percent. The Central Bank has generally maintained its benchmark rate, meaning tht banks could not charge more for loans.
Last month, MPs rejected a June request by the Treasury to remove the rate cap. The MPs said lenders had not proven they could be trusted to lower rates without pressure. The […]