Kenya Treasury Sees Rate Cap Being Unsustainable `Very Soon'

(Bloomberg) -- Kenya’s Treasury is drafting a new law meant to improve access to credit in East Africa’s biggest economy, saying rate caps introduced in 2016 will “very soon” be unsustainable.

The proposed law will seek to deal with credit management, the price of loans, consumer protection, credit worthiness and the conduct of financial markets, Treasury Secretary Henry Rotich told reporters in the capital, Nairobi. It will be introduced in parliament in June alongside the budget, he said.

“We cannot introduce a bill that will worsen the situation,” Rotich said Friday. “The bill is meant to address the root cause of the problem. Caps are a secondary solution, but the primary solution is why the interest rates are high and what are the measures that can be put in place to ensure interest rates are sustainability lowered.”

Since September 2016, banks can only charge as much as 400 basis points above the prevailing benchmark interest rate after the government passed a law limiting commercial interest rates. The cap has worsened loan access for households and businesses, and caused banks to lend more to the government, whose budget-financing gap widened to 7.2 percent this fiscal year.

Rotich said the Treasury will reduce its 2017-18 budget by 60 billion shillings ($595 million) in response to calls by the International Monetary Fund and the World Bank for the government to check its spending.

The state plans to also borrow less from the domestic market in coming years to make more cash available to the private sector, he said. In addition to reducing the fiscal deficit, which will reduce the Treasury’s appetite for local debt, it will also seek cheaper loans from elsewhere, he said, citing semi-concessional credit from China of about 20 years for 2 percent and World Bank loans of 40 years with interest rates below 1 percent.

Kenya’s domestic debt rose to an all-time high of 2.37 billion shillings at the end of March, according to the central bank.

©2018 Bloomberg L.P.