Kenya’s President Rejected Rate-Cap Bill, Central Bank Head Says

(Bloomberg) -- Kenya’s president rejected a bill that seeks to retain caps on interest rates that banks can charge on loans, paving the way for the removal of a law that’s been choking the economy, central bank Governor Patrick Njoroge said.

President Uhuru Kenyatta sent the Finance Bill back to parliament and won’t sign it as long as it provides for interest-rate limits, Njoroge said in an interview Wednesday in Washington.

In 2016, lawmakers approved the Banking Act, which limits the amount lenders can charge on loans to 4 percentage points above the central bank rate. While it was intended to improve lending terms for consumers, it has instead made institutions more selective in who they provide money to, cutting into banks’ profit margins and sending people to borrow from unregulated microlenders at even-higher rates.

The Nairobi High Court annulled the banking law in March but suspended enforcement of the ruling for a year so lawmakers could review the legislation. A parliamentarian then proposed changes that clarify the extent to which banks can price loans.

In the 2019 Finance Bill, the Treasury recommended scrapping the law, but a parliamentary committee rejected that proposal and supported retaining the rate caps. That’s what the president wants removed, Njoroge said.

“The economy is being choked by interest-rate caps,” he said. “If you want small and medium enterprises to continue strengthening and employ people, you have to let go of these interest-rate caps.”

Instead of boosting borrowing, private-sector credit growth slowed as banks preferred lending to the government. While it has slightly recovered this year, it’s much lower than when the limits were introduced three years ago. Njoroge and the central bank have been vocal critics of the rate caps, saying they complicate the implementation of monetary policy.

Parliament could agree with the president and amend the bill to remove the rate caps, or could decide to push the bill through, which would require two-thirds support in the house.

“It’s very unlikely that they will come up with two-thirds of votes, so we believe that we are in a position, very soon, of overturning the interest-rate caps,” Njoroge said. “The president says remove it.”

Banking shares jumped on the news. KCB Group Ltd., Kenya’s biggest lender, surged the most since May 2019 by the close in Nairobi, as did Equity Group Holdings Plc, the largest bank by market value. The yield on the country’s Eurobond due in 2024 fell 13 basis points to 5.43% by 5.39 p.m. in the capital, Nairobi.

Lawmakers will debate and vote on the president’s memorandum in the next two weeks, Aden Duale, the National Assembly’s majority leader, said in a text message.

Read more about the judgment that annulled the rate-cap law

Lenders in Kenya have been wrestling with the uncertainty about how much they can charge for loans. Njoroge said he’s had conversations with banks and they understand “they can not take advantage” if rate caps are removed.

“They can not go back to the old way of behaving. They have to keep up with the times and be more customer-centric,” he said.

--With assistance from Adelaide Changole, David Herbling, Eric Ombok, Hilton Shone and Helen Nyambura.

To contact the reporter on this story: Rene Vollgraaff in Johannesburg at rvollgraaff@bloomberg.net

To contact the editors responsible for this story: Benjamin Harvey at bharvey11@bloomberg.net, Ana Monteiro, David Malingha

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