Kenya’s Treasury seeking to base lending rates on people’s risk profiles

By The Eastafrican

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Kenya’s National Treasury is working on a proposal that will regulate all lenders, including banks, in a bid to make credit more accessible and affordable.

The EastAfrican has learnt that the proposal is part of a response to the interest rates capping passed by parliament in 2016 that has been broadly seen as not achieving the objective of allowing access to credit at affordable rates to borrowers.

The proposal, which will involve looking at borrowers with different risk profiles to ensure lending rates are based on them, is among suggestions contained in the Financial Markets Conduct Bill 2018.

“For a long time, market conduct of lenders has not ben given sufficient attention. This Bill is addressing this as part of efforts to make credit affordable to all borrowers, based on their profiles. For example, salaried employees should be considered less risky than others who do not have a predictable income on a monthly basis,” Dr Geoffrey Mwau, a director-general at the Budget, Fiscal and Economic Affairs Department in Kenya’s National Treasury told The EastAfrican.

He added: “We are looking at differentiated rates for different people depending with their risk profiles to ensure that people are not overcharged. The proposal is still under discussion.”

Fixed rate

Currently, most lenders charge borrowers a fixed rate regardless of their risk profiles, a situation that has encouraged banks to shun lending to individuals and SMEs, which they consider high risk, and direct their lending to large corporate borrowers and government.

To address this, the National Treasury is also implementing a credit guarantee scheme, by developing the law and institutional framework that will ensure SMEs and more risky borrowers access credit at affordable rates.

This will involve the government working with other stakeholders.

“Over time, through this scheme, banks and other lenders will know who is risky and who’s not. The government will also work with credit reference bureaus to ensure information about borrowers is standardised and reported appropriately,” Mr Mwau added.

The National Treasury is consulting and seeking the input of banks, Members of Parliament and other stakeholders with a view to coming up with a “more realistic” solution to access to credit at an affordable rate.

This, according to Dr Mwau, will involve amendment to different laws to avoid any inconsistencies in the laws governing the lending sector.

Kenya has fixed the lending rates for banks at four percentage points above the prevailing Central Bank Rate (CBR) following the enforcement of the Banking Amendment Act 2016 in September 14, 2016.

However, this Act does not regulate non-deposit taking lenders and mobile money lenders, many of whom have taken advantage of the situation to charge exorbitant rates.

The Banking Act also requires banks and financial institutions to disclose all charges and terms relating to a loan before granting it to a borrower and caps minimum interest rates on deposits at 70 per cent of the existing CBR.

Benchmark lending rate

Last week Central Bank’s Monetary Policy Committee (MPC) retained the benchmark lending rate at 9.5 per cent setting lending rates at 13.5 per cent.

The Bill for the control of interest rates was introduced in parliament as private members Bill by the Kiambu township legislator Jude Njomo after commercial banks refused to heed to the government call to lower their lending rates which had skyrocketed to as high as 30 per cent in 1994 and over 25 per cent in 2011.

Being a private members Bill former Attorney General Prof Githu Muigai said it would only take the intervention of parliament to review or abolish the rate cap law.

However last week Mr Njomo told The EastAfrican that parliament would not allow any Bill that seeks to review the interest rate caps and that the action by banks to freeze credit to the private sector is a well calculated move for this law to be reconsidered.

“I don’t think anybody is ready to review the caps apart from the banks. I have talked to my colleagues in the house and I don’t think anyone of them is willing to review.

Whoever was drafting the Finance Bill 2018 read the mood of the country and knew that if he/she included the provisions to review the rate caps, the whole Bill would collapse on the floor of the house,” said Mr Njomo.

The IMF and the World Bank have instructed Kenya to review the rate caps arguing the legislation has stifled credit to the private sector while the Central Bank argues that the law has reduced the effectiveness of its monetary policy instruments of controlling money supply in the economy.

Kenya committed itself to review the rate caps during its discussion with the IMF in March this year that led to the extension of its $1.5 billion precautionary facility whose review was postponed last year.

Although the facility was approved the IMF would be completing its outstanding programme reviews of Kenya’s economy by September this year.

In April this year the parliamentary Finance Committee rejected CBK Governor Patrick Njoroge’s request to remove controls on interest rates arguing move was meant to please the Bretton Woods institutions at the expense of borrowers.

While the current lending rate in Kenya is capped at 13.5 per cent interest rate on Treasury bills has averaged 13.95 per cent from 1991 until 2018, reaching an all-time high of 84.67 per cent in July of 1993 and a record low of 0.83 per cent in September of 2003. This sounds appetising for banks to lend to the government.