Kenyan MPs Propose Keeping Rate Cap, Jeopardizing IMF Loan

(Bloomberg) -- Kenya’s parliament defied a bid by the Treasury to remove a cap on commercial interest rates that’s crimped bank lending.

Draft legislation agreed by lawmakers on Wednesday undermines the government’s ability to raise a new standby loan from the International Monetary Fund, which has insisted the limit be scrapped in return for new funding. It may also further slow the growth in lending to the private sector, which dropped to 2.4 percent last year from 9.3 percent in 2016.

Lawmakers also voted to repeal a requirement that banks pay savers a minimum of 70 percent of the central bank rate. Lending rates remain capped at 400 basis points above the benchmark rate, currently 9 percent.

“Banks have still been making colossal profits they were making before the cap,” lawmaker Antony Kimani Ichung’wa said during a debate in parliament Wednesday in the capital, Nairobi. “With the 4 percent spread, banks have made profits. We are widening the spread by removing the floor, so that banks have flexibility.”

Kenya’s government imposed the cap in August 2016 to fulfill an election-campaign pledge by President Uhuru Kenyatta to improve lending terms for consumers, against the advice of the central bank. The measure exacerbated a slowdown in credit growth, with banks including KCB Group citing their inability to compensate for riskier customers by charging higher rates for the slump.

Loan Extension

Treasury Secretary Henry Rotich called for the repeal of the legislation in his budget speech in June. Central bank Governor Patrick Njoroge has complained the cap complicates monetary policy by making credit demand hard to predict.

The IMF granted Kenya a six-month extension to a $1.5 billion standby loan in March to complete delayed reviews of the facility, before the government embarks on talks about a new potential program. The funding is available to shield the economy from exogenous shocks.

“The odds of a new facility are quite slim and the market may pay more attention to this,” Jibran Qureishi, regional economist for Stanbic Holdings Ltd. in Nairobi, said in an emailed research note. “Whereas Kenya doesn’t face a balance of payments crisis at present, the credibility that is attached to an IMF approval or acknowledgment should not be discounted.”

The six-month extension to the IMF facility expires on Sept. 14. The draft law, known as the Kenya Finance Bill 2018, must be submitted to Kenyatta for his assent.

Lawmakers also proposed:

  • Extending an exemption on value-added tax for fuel until 2020
  • Rejecting the Treasury’s plan to establish a fund to finance home building
  • Rejecting the so-called Robin Hood proposal that money transferred in excess of 500,000 shillings pay a 0.05 percent tax
  • Annulling adjustments to excise duties for inflation
  • Retaining a tax on gambling winnings at 35 percent
  • Rejecting a 10 percent excise duty on fees charged for money-transfer services
  • Rejecting a proposal to increase banks’ core capital to 5 billion shillings by 2021

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