Kenyan Court Annuls Law on Interest-Rate Cap for Lenders

(Bloomberg) -- A Kenyan court annulled a contentious banking law that caps what lenders can charge consumers for loans at 4 percentage points above the central bank rate, calling the legislation “vague, imprecise, ambiguous and indefinite.”

The Nairobi High Court suspended the implementation of the ruling for 12 months to give the National Assembly an opportunity to reconsider the provisions, according to the Thursday judgement. Boniface Oduor filed the lawsuit in 2016, claiming the act discriminated against banks, Business Daily Africa reported at the time.

The period before enforcement will allow the “regulator to put in place appropriate mechanisms,” Central Bank of Kenya said on its Twitter account after the ruling.

The suspension “provides a sufficient amount of time to ensure that checks and balances are put in place, as part of any transition to the lifting of the loan-rate cap,” said Razia Khan, the chief economist for Africa at Standard Chartered Bank Plc. “Anything that boosts private-sector credit extension will be a positive for the Kenyan economy.”

Credit Slows

The East African nation’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 and the National Treasury. The limit has cut into lenders’ profit margins, forcing them to be more selective in who they provide money to.

Growth in private-sector credit extension averaged 2.4 percent in 2017 and 2018, compared with average annual expansion of 20 percent in the decade before the law came into effect, central bank data show.

The ruling is unlikely to affect the March 27 interest-rate decision, said Khan, who sees the Monetary Policy Committee raising the benchmark by 50 basis points in September from 9 percent now.

The Consumer Federation of Kenya, which was enjoined in the case as an interested party, is considering appealing the decision, said Steve Mutoro, its secretary general.

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