Rate cap: Who between governor and banks will blink first?

CBK governor Patrick Njoroge. FILE PHOTO | NMG He fashioned his entry at Central Bank of Kenya (CBK) as an era of new normal. True to his word, governor Patrick Njoroge controls the stars of all the 40 commercial banks.

Simply, Dr Njoroge takes no prisoners. Once at pains to explain how three banks sunk into receivership in quick succession and his admission that CBK “was sleeping,” he wants everything in the palm of his hands.

If there is one thing you cannot get a Kenyan banker to comment on since governor Patrick Njoroge sat at the apex bank, it is the value of the shilling. Last week, bankers were tongue-tied about yet another thing: How they would price their loans now that the rate cap is gone.

The repealed law was obvious and elaborate, four percentage points above the Central Bank Rate (CBR). This meant that when the Monetary Policy Committee meeting adjusted the CBR, banks would have followed suit.

But when Smart Company polled several top banks on what direction they were likely to take, they all refused to give their position.

Dr Njoroge, who has on many occasions reiterated his enthusiasm about the consumer, now faces the test of shielding customers from exorbitant interest rates while at the same time not appearing to interfere with market pricing.

Gave them marching orders

On Tuesday, CBK sent out a terse letter to all bank chief executives ordering them to change the terms of all existing loans into fixed rates warning them that they can only reduce interest rates on existing loans. CBK then gave them marching orders on how they will have to conduct themselves post-rate cap.

“Banks cannot revise interest rates upwards for credit facilities entered into while the interest rate caps were in force. In the circumstances, unless revised downwards the interest rates of such loans will remain fixed until the loans run their full course,” CBK assistant director of banking supervision Matu Mugo said in the circular.

This solves one big problem for the governor, because a Sh2.766 trillion loan book will remain priced at a maximum of 13 per cent until maturity, muting any significant predatory pricing in the near future.

Instead, the loans will be re-priced as they mature, which will depend on how long each bank had given out loans.“They are not going back to the same old ways of the past, the wild west kind of banditry,” Dr Njoroge […]

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