James Muliro
The Central Bank of Kenya has poured cold water on attempts by Members of Parliament to set a lid on the maximum interest rates banks should charge their customers. The move came days after the banking sector regulator released a list of bank rates charged by different lenders in Kenya.
This comes on the backdrop of increased clamour for the reduction of interest rates, which have remained beyond the reach of many.
Legislators are among the many voices that have called for the regulation of interest rates as a measure of prompting them to lower the cost of money. CBK governor Dr. Patrick Njoroge is however opposed to the attempts by the lawmakers to, once and for all, lower the cost of borrowing. His argument is that Kenya is a free market economy where transactions are guided by demand and supply factors as well as by competition.
Addressing the National Assembly’s Finance Committee last month on renewed attempts by lawmakers to regulate lending rates, Dr. Njoroge said this attempt would be detrimental to the economy. The idea should therefore be abandoned, he told the MPs.
“This (interest rate caps) would be extremely harmful to the economy. We strongly urge you to reconsider this because it is not just a dangerous step but harmful and ineffective,” the CBK boss told the parliamentary committee.
When Dr. Njoroge came into office after the retirement of Prof. Njuguna Ndung’u, he made clear his intentions to lowering the cost of loans in the market. One of the ways would be through naming and shaming the most costly lenders, a promise that he has kept about six months after assuming office.
As it were, Kenya does not have a decree that enforces a ceiling on interest rates that banks should charge their customers. In 2001, Gem Constituency lawmaker Joe Donde introduced a Finance Amendment Bill in a bid to create one to that effect but his attempts drew blanks as retired President Daniel arap Moi refused to assent to the bill. Another failed attempt came a decade later in 2011 through the Finance Bill.
Apart from the CBK, the Kenya Bankers Association (KBA) has consistently opposed attempts to cap the maximum lending rate charged by commercial banks. KBA, which is a lobby group that represents 43 commercial banks in Kenya, argues that regulating interest rates would suppress gains that have been made in the financial services industry.
The debate on the regulation of lending rates was reignited in 2012 when the cost of funds rose astronomically. While banks continue to make huge profits by charging their customers steep interest rates, the level of non-performing loans in the banking industry has continued to grow and stands at well over Sh100 billion.
Proponents of interest rate caps such as Donde argue that from 1906 to the 90s when lending rates were regulated, lenders not only made sensible profits but also adequately compensated depositors. But, from 1993 to date, the lenders continue to make what pundits have come to refer to as “abnormal profits” while giving a pittance to depositors and savers.
In 1991, banks charged their customers an average of 17 %. They paid 13 % to savers, the same as that paid to depositors. This was a win-win for all. A decade later, banks were charging borrowers an average of 20 %, but the same could not be said of deposits or savings. Depositors were then getting paid about six per cent while savings attracted just four per cent. Just two years later (in 2003), borrowers were being charged 19 %, depositors were being paid 3% while savers took home only 1.3 % on their cash at the end of that year. The situation has not changed.
The debate on the regulation of interest rates has remained. Its proponents suggest that banks should lend money to the public at a rate not exceeding four percentage points above the CBK’s policy rate. On the other hand, banks would pay depositors at a rate of 70 % of the CBK’s policy rate.
“We believe this will be quite damaging to the economy. Banks would find other mechanisms. They would introduce additional fees,” Dr. Njoroge said.
While releasing the list of bank interest rate charges, the CBK noted “Lack of transparency in pricing of credit by the lenders can expose borrowers to high lending interest rates … Publication of average lending rates for commercial banks is expected to increase transparency and enable the borrowing public to make informed borrowing decisions,” the CBK said.
K-Rep Bank, which is majority owned by Centum, is the most expensive lender in the personal/household loan category at 25.7 % with a tenure of between one to five years. The lender is closely followed by Consolidated Bank with a rate of 25.4 %.
The third most expensive bank in the personal loans category is Middle East Bank with a rate of 24.2 %. UBA Bank ranks fourth with 24.1 % while Guaranty Trust Bank comes fifth with a rate of 23.7 % on personal loans. In the case of business loans with tenure of between one to five years, K-Rep, Jamii Bora and Guaranty Trust banks were the most expensive with rates of 27.2 %, 24 % and 23.4 % respectively.
On the flipside, Housing Finance and Family Bank offered the lowest rates.
