Kenya Will Repeal Interest-Rate Cap That Curbed Bank Lending

(Bloomberg) -- Kenya plans to repeal a law that caps commercial interest rates, after it crimped lending by banks in East Africa’s biggest economy, Treasury Secretary Henry Rotich said.

The surprise proposal to repeal section 33B of the Banking Amendment Act will be welcomed by Kenyan banks that have complained the 400 basis-point ceiling on the cost of loans nullified their ability to price risk. The measure, introduced in August 2016, exacerbated a slowdown in credit growth to the private sector, which was 2.8 percent in April from 13.5 percent two years ago.

The amended law resulted in financial access and economic growth being “adversely affected,” Rotich said in his annual budget speech in the capital, Nairobi, on Thursday. “In order to enhance credit and minimize the adverse impact of the interest capping on credit, while strengthening financial access and monetary policy effectiveness, I propose to amend the Banking Amendment Act 2016 by repealing section 33B.”

The legislation has complicated monetary-policy makers’ drive to boost loans and support growth. The cap was introduced to fulfill an election pledge by President Uhuru Kenyatta to improve lending terms when he campaigned for his first term in office. Kenyatta, who was elected for a second term in October, has conceded the caps failed to increase credit.

Parliament Opposition

The Kenya Bankers Association, the main industry lobby group, welcomed the proposed removal of the cap, Vice Chairman John Gachora said by phone, as Jude Njomo, the lawmaker who proposed the amendment, said members of parliament would oppose its repeal.

“Parliament is going to resist any attempt to change that law, because so far, we do not trust the banks,” Njomo said.

Another unexpected announcement by Rotich on Thursday was a decision not to implement proposed increases in income and capital-gains taxes, after public opposition to the plan. The Treasury released a draft bill last month proposing a 35 percent tax band be introduced on individuals earning more than 750,000 shillings per month and that the levy on capital gains be hiked to 20 percent from 5 percent.

‘Not Appropriate’

“Members of the public raised concerns on these proposals and were of the view that the higher rates are not appropriate at this time,” Rotich said.

Other tax proposals proposed by Rotich to fund his 2.56 trillion-shilling ($25.3 billion) budget include:

MeasureProposedCurrent
Excise duty on mobile-money transfers12%10%
‘Robin Hood’ tax on bank transfers >KES500k0.05%--
Withholding tax on gambling winnings20%--
Capital-gains tax on property transfers5%--
Tax on insurance premiums paid to non-residents5%--
National Housing Development Fund (%age of gross pay)0.5%
Excise on vehicles with engine >2,500cc30%20%
Import duty on iron, steel products35%25%
Import duty on second-hand clothing, footwear35%--
Kerosene excise duty (KES/liter)10.317.21

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