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A Kenyan court this past week overturned the controversial law that introduced control of lending interest rates, terming it unconstitutional.
The ruling delivered on Thursday set the stage for the return of expensive loans to businesses and households, but returned the Central Bank’s monetary policy instruments to control lending rates, which had been rendered ineffective after caps were introduced in 2016.
The private sector, which was cut out of the chain as banks chose to lend to the government, is now upbeat that the latest decision will give them a leg up, amid flat credit growth to the sector.
Since the introduction of the rate cap, credit growth to the private sector has been on a downward trend from a high of 5.4 per cent in August 2016, to as low as 2.4 per cent in 2017 and 2018, according to data from Central Bank.
Prior to the rate cap, credit growth to the private sector had peaked at a high of 21.2 per cent in July 2015.
But, as optimism spreads in the private sector, the High Court decision is bound to expose the government to expensive borrowing from the local market, further escalating the public debt currently estimated at over Ksh5 trillion ($50 billion).
“The court has found the provisions of Sections 33B (1) and (2) of the Banking Act to be vague, imprecise, ambiguous and indefinite. And in so far as the contravention of the provisions attracts penal consequences, the same violate Articles 29 and 50 of the Constitution,” said the High Court in Nairobi.
“The Court therefore declares the Sections 33B (1) and (2) of the Banking Act to be null and void.”
Judges Francis Tuiyot, Jacqueline Kamau and Rachel Ngetich suspended the effect of its decision for 12 months to mitigate against the possible ramifications and disruptions on existing contractual relationships between banks and their customers.
During this period, parliament is expected to reconsider its stand on the provisions of the Banking (Amendment) Act No 25 of 2016 which introduced Section 33B into the Banking Act (Cap 488 of the Laws of Kenya), thereby capping lending rates.
According to the ruling, Central Bank’s Circular No.4 of 2016 dated September 13, 2016 would continue to provide a measure of clarity to the questionable provisions during this 12-month period.
Kenya introduced controls on banks’ lending rates in 2016, ostensibly to ensure businesses and households access affordable credit.
The Banking Amendment Act 2016 in September 14, 2016 fixed the lending rates for banks at four percentage points above the Central Bank Rate (CBR).
The Act also required banks and financial institutions to disclose all charges and terms relating to a loan before granting it to a borrower and capped minimum interest rates on deposits at 70 per cent of the existing CBR.
Currently, CBK’s policy rate stands at nine per cent, effectively fixing lending rates at 13 per cent.
But banks have avoided lending to individuals and Small and Medium-sized Enterprises (SMEs) which they consider high risk and opted to channel funds to risk-free government securities.
The returns on the 91-day Treasury bills are currently estimated at 6.8 per cent while that on the 182-day and 364-days stands at 8.2 per cent and 9.4 per cent respectively.
An attempt to review the rate cap law by the National Treasury met intense opposition from parliamentarians and consumer lobbies.
Last year, Dr Geoffrey Mwau, a director-general at the Budget, Fiscal and Economic Affairs Department said Treasury was working on a proposal to price loans based on the risk profiles of individual borrowers.
The Consumer Federation of Kenya (Cofek) however rejected the plan arguing the move would create a loophole for banks to exploit borrowers by setting their own high risk premium rates.
Kiambu township legislator Jude Njomo, the sponsor of the private member’s Bill that led to the control of interest rates said Treasury has no justification to seek for a review of the interest rates caps since banks have refused to lend to the private sector.
Mr Njomo introduced the Bill in parliament after commercial banks refused to heed to the government call to lower their lending rates which had skyrocketed to as high as 30 per cent in 1994 and over 25 per cent in 2011.
However, in August last year, parliamentarians voted to tweak the Banking (Amendment) Act 2016 and removed a clause that compelled banks to pay depositors at least 70 per cent of the Central CBR.
The International Monetary Fund and the World Bank had also instructed Kenya to review the rate caps arguing the legislation was stifling credit to the private sector, while the Central Bank argues that the law has reduced the effectiveness of its monetary policy instruments of controlling money supply in the economy.
Kenya committed itself to review the rate caps during its discussion with the IMF in March last year that led to the extension of its $1.5 billion precautionary facility. The facility was later discontinued in September 2018.
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