UPDATE 2-Kenya ditches cap on banks’ commercial lending rates

(Adds more details)

NAIROBI, Nov 5 (Reuters) – Kenya’s President Uhuru Kenyatta’s bid to remove a cap on commercial lending rates was passed in parliament on Tuesday, potentially boosting the flow of credit to the country’s economy.

The Kenyan government and the country’s banks have blamed the rate cap, imposed in 2016, for curbing private sector lending growth and reducing the effectiveness of monetary policy.

The cap has also had an impact on the wider economy as credit-starved businesses had to lay off staff.

“This will ultimately be a positive move that puts Kenya on a firmer growth trajectory in the future,” Razia Khan, head of research for Africa at Standard Chartered, said.

Kenyatta had refused to sign the government’s budget for this financial year earlier this month, demanding that lawmakers repeal the cap.

The repeal of the cap required just a simple majority to pass through parliament, while opponents needed two-thirds of the 349-member house to vote against to override the president.

The speaker of the national assembly Justin Muturi said during the televised session of parliament that there were only 161 lawmakers present, giving the president’s amendments an automatic passage.

In the amendments to the rate cap legislation, legislators shielded existing loans from higher interest rates once the cap is repealed which will follow the president signing the changes into law.

The government also blamed the cap for an increase of loan sharks and other predatory lenders targeting those deemed too risky to lend to by the banks.

Although annual economic growth rates have exceeded more than five percent in the last five years, Kenyans have questioned the quality of that robust growth, citing widespread unemployment and lack of access to funds for small businesses.Jibran Qureishi, an economist for East Africa at Stanbic Bank, said the cap removal will embolden policymakers to embark on an easing stance and boost credit flow.“The IMF may be quite pleased with these developments,” Qureishi said. “If the fiscal side is brought in order, a new precautionary facility may be on the cards too.”Kenya has been discussing a new stand-by credit facility with the International Monetary Fund after the expiry of a previous one last year.

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