President Uhuru Kenyatta has asked the banking regulator to rein in rogue lenders that inflate the cost of borrowing for businesses and households after the scrapping of the legal caps on interest rates last November.
The President told the Central Bank of Kenya to take regulatory action on banks, which load hidden transactional and processing fees onto interest they charge on loans, burdening borrowers with the cost of credit.
Mr Kenyatta on November 7 signed the Finance Bill 2019 into the law, bringing to an end the September 2016 legal ceilings on loan interest charges.
This is expected to raise credit flow to businesses and homes albeit at a higher cost after banks were handed a free hand in pricing loans.
“The removal of the interest rate cap in November last year will facilitate the availability of more credit to businesses, which will, in turn, increase the circulation of money,” Mr Kenyatta said in a televised address to the nation.
“I urge the Central Bank to use the full range of instruments of regulation and policy at its disposal to prevent predatory lending and ensure that banks can offer loans at affordable interest rates.”
Risk-averse banks resorted to rationing credit based on the risk of default of borrowers after interest rate caps were enforced in September 2016, opting to increase cash allocation to government debt whose risk of default is near zero.
Some, however, started advancing credit through mobile lending platforms where interest was not capped under the law.
KCB (KCB M-Pesa), Commercial Bank of Africa (M-Shwari), Equity (Equitel), Co-operative (M-Coop Cash) and Barclays (Timiza) are some of the tier-one commercial lenders, which offer instant mobile loans, with a repayment period of between one and three months.
Borrowing on the mobile loan apps powered by the banks, which are easily accessible through smartphones, costs between two and eight percent in monthly facilitation fees, which equates to more than 80 percent interest when computed annually.