Kenya’s Parliament Scrap Interest Rate Caps on Commercial Lending

Kenya's Parliament Scrap Interest Rate Caps on Commercial Lending

Kenya’s parliament on Tuesday scrapped commercial lending rate caps setting the stage for financial institutions to charge interest rates on loans borrowed by the customers.

President Uhuru Kenyatta in his memorandum to Parliament after declining sign the Finance Bill 2019 into law,  said capping of interest rates has not addressed the intended objective particularly in expanding credit access. He, therefore, recommended the bill be amended by deleting Clause 45 and substituting, therefore, the following: The Banking Act is amended by repealing section 33B

The Central Bank of Kenya (CBK) had said the capping of interest rates had infringed on its independence and complicated the conduct of monetary policy.

“It is found that under the interest rate capping environment, monetary policy produces perverse outcomes,” it had said.

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The Kenya Bankers Association (KBA) State of Banking Industry Report 2019, shows interest rate caps prompted adjustments that saw banks shift from riskier segments to investments that balance returns and asset quality.

As a result, this contributed to a slow down in lending to the private sector, particularly to Micro, Small and Medium-Scale Enterprises (MSMEs) which are the bulk of Kenya’s economy.

In March 2019, a three-judge Kenyan High Court bench ruled that capping of commercial banks’ lending rates at 4 percentage points above the Central Bank of Kenya benchmark rate was unconstitutional. 

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Amendments to the Banking (Amendment) Act 2015 were introduced by Kiambu Central MP Jude Njomo and signed into law in August 2016.

The law capped the maximum loan rate at four percentage points above the Central Bank Rate (CBR) and the minimum deposit rate at 70 percent of CBR.