Uhuru now asks Parliament to repeal law capping loan interest rates
President Uhuru Kenyatta has declined to approve the Finance Bill and has instead asked MPs to scrap commercial lending rate caps that critics say have led to a credit squeeze.
Should MPs now agree with him and remove the cap, borrowers will be left at the mercy of banks on the one hand, while on the other, banks will have the freedom to price their loans depending on their risk assessment.
Mr Kenyatta is in agreement with the Treasury and the Central Bank of Kenya that the interest rate cap is hurting the economy.
Their argument is that the cap has cut private-sector loan growth because banks have avoided lending to customers deemed as risky, including small and medium-sized businesses as well as individuals who borrow for consumption.
The notice from State House for repeal of the law that imposes a cap on interest rates will be communicated to lawmakers today.
“The President has not assented to the Bill and has returned it to Parliament for review. The issue is the repeal of interest capping law,” Aden Duale, the Leader of Majority in the National Assembly, told the Business Daily Wednesday.
“The memorandum will be communicated to the House tomorrow afternoon (today) by the Speaker”.
This is a win for banks who have argued that the cap has slowed down their profitability and multinational agencies like the International Monetary Fund (IMF), which have called for scrapping or modification of the interest restriction law.
The government in September 2016 imposed the legal caps on lending rates at four percentage points above the Central Bank’s benchmark — currently nine per cent — and puts the maximum borrowing rate at 13 percent.
The removal of the cap looks set to expose borrowers to high lending rates, which had touched a high of 25 percent before the introduction of the ceiling.
Analysts expect the news of possible removal of the caps to spark a rally in banking stocks — which took a hit from the interest rate restriction — at the Nairobi Securities Exchange (NSE).
Repeal the law
It remains to be seen how law makers will react to the President’s recommendations to repeal the cap, given that MPs have twice rejected attempts by the Treasury to push for a repeal of the law that ushered in the caps.
Mr Kenyatta will seek to use his numerical strength in Parliament to marshal the numbers needed to override MPs and to repeal the law. On the other hand, MPs will require a two thirds majority — or 233 lawmakers — to overturn the President’s memorandum on the amendments.
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