Kenyan Lawmaker Proposes Negotiated Loan Rates Based on Risk

(Bloomberg) -- A Kenyan lawmaker has called for negotiated interest rates, based on customers’ risk profile, of up to 6 percentage points above the existing cap on charges to negate the slowdown in lending that followed the measure.

The amendment would free up credit to small- and medium-sized enterprises, “discourage government borrowing from the domestic market, drive private-sector credit growth and spur fresh economic activity and growth,” Moses Kuria said in a letter to the Speaker of the National Assembly Justin Muturi.

Kenya introduced the ceiling in 2016 at 4 percentage points above the prevailing central bank rate to check “excessive and punitive interest rates,” he said. The cap exacerbated a slowdown in lending in East Africa’s biggest economy, with private-sector credit growth sinking to a low of 2.4 percent in the 12 months through December 2017.

Credit growth was expanding 5.4 percent when the cap was introduced in August 2016, compared with 21 percent a year earlier. The central bank expects a rebound to 7 percent by the end of 2018.

“This is because the cap as it exists has removed the legroom for pricing risks,” according to the letter. “If nothing is done, our economy will dip into recession.”

‘Can of Worms’

Kenyan President Uhuru Kenyatta previously backed the cap, but has conceded that the law introduced in August 2016 created “unintended consequences.” Central bank Governor Patrick Njoroge has urged lawmakers to repeal the limit, likening it to doping by athletes, which he said gave a false boost to performance.

Many legislators have opposed the removal of the law, saying banks had become rapacious lenders. Kuria said he’d met with Treasury Secretary Henry Rotich about the proposed “middle-ground” amendment.

“We’re expanding to reach those excluded by banks,” he said by phone from the capital, Nairobi. “Those currently struggling to get loans now have a window. And that risk comes at a price.”

If passed, the changes will “open a can of worms” as they could see borrowers receive credit at a rate as high as 19 percent, given the central bank’s current 9 percent benchmark rate, according to Jude Njomo, the legislator who introduced rate caps back in 2016.

“This takes us back to the days before the rate caps, when banks were lending at between 18 percent and 24 percent,” Njomo said by phone. “Banks will treat everyone as high risk and all will be charged 19 percent.”

The International Monetary Fund has also urged Kenya to remove or significantly amend the law, saying the cap risked damping economic growth in the country.

“I would like to see a repeal of the law, but this is better than nothing,” said Jibran Qureishi, a regional economist at Nairobi-based Stanbic Holdings Plc. “The IMF would settle for the proposal from Kuria because it would be better than the law as it currently is. If it is passed, it is a feather in the authorities’ cap.”

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