Roundup: Kenyan president signs bill into law to cap interest rates

Kenyan President Uhuru Kenyatta on Wednesday signed into law a bill which seeks to cap interest rates charged by commercial banks on loans and deposits.

The Banking Amendment Bill 2015, which was passed by parliament in July, effectively limits the interest rates charged by banks to four percent of the Central Bank Rate (CBR).

Under the bill, with the CBR currently at 10.5 percent, banks cannot charge higher than 14.5 percent as interest on credit.

The bill intends to regulate 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.

In a statement, President Kenyatta noted with concern that despite previous attempts to dialogue and lower interest rates, banks had failed to live up to their promises with interest rates ever rising.

"We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms," the president said.

Kenyatta said Kenyans were frustrated with the financial sector, particularly banks, over "the cost of credit and the applicable interest rates on their hard-earned deposits".

The move to cap the interest rates is the third time that the National Assembly has attempted to reduce interest rates to affordable levels. In the previous two instances, dialogue and promises of change prevailed and banks avoided the introduction of these caps.

"In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates," Kenyatta said.

The law has ignited stormy debate in the East African nation, which has seen banks come under fire for charging rates as high as 27 percent.

Commercial banks had promised to lower their lending rates to be responsive to the public demands. However, only small banks have been scrambling to issue notices announcing that they will lower their lending starting late this month.

About 10 banks of the 42 that operate in Kenya have issued notices in the last one week, informing their customers that they will cut interest rates by between 97 and 100 basis points starting Wednesday. But missing in the list are the large peer group lenders who control close to 60 percent of the market.

Kenyatta said Kenya had one of the highest returns-on-equity for banks in the African continent.

"Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers," Kenyatta said.

Both the National Treasury and the Central Bank of Kenya have been opposed to the capping of interest rates, arguing it would be counterproductive to the economy.

Banks have at one point said that with interest rate caps, they would be forced to turn away perceived risky borrowers, locking out millions from the credit market. Endit