The Kenya Bankers Association has welcomed the National Treasury’s proposal to repeal the Banking (Amendment) Act 2016.
According to Dr. Habil Olaka, CEO of KBA, this will pave the way for the Treasury and Central Bank of Kenya to work with sector stakeholders to promote financial inclusion and consumer protection.
“It will pave the way for the Treasury and Central Bank of Kenya (CBK) to work with sector stakeholders to chart the best way forward that serves the interest of the economy while promoting financial inclusion and consumer protection,” said Dr Habil Olaka, chief executive officer, KBA in an op-ed in Daily Nation ‘Interest rate cap repeal can free credit market’.
The Act was motivated by the need to increase credit uptake and promote a savings culture through interest rate regulation. However, it has instead precipitated tight conditions of lending, resulting in a two per cent credit expansion in the private sector.
The capping of interest rates constrained banks from lending to SMEs and the private sector, leading them to invest in risk-free government securities that offer higher returns on a risk-adjusted basis.
The CBK’s draft report on the impact of interest rate capping on the Kenyan economy stated that their analysis showed that interest rate caps had started to yield negative effects.
On July 28, 2016, the National Assembly passed the Banking (Amendment) Bill, 2015 regulating interest rates that are applicable to banks’ loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits.
However, if the proposal by the National Treasury to repeal the interest rate cap is implemented, it could result in upward pressure on interest rates as banks resume pricing loans based on risk profiles.
Restoring credit growth as a catalyst for investment and consumption will be fundamental for the Kenyan economy. The Kenya Bankers Association believes that repealing the Banking (Amendment) Act 2016 will help achieve this goal.