On Thursday 24, 2016, President Uhuru Kenyatta signed the interest rate bill that was forwarded to him after being passed by parliament. The law requires that no bank should charge customers more than 4 % the Central bank interest rates.
Upon signing the bill, the president noted:
“On July 28, 2016, the National Assembly passed the Banking (Amendment) Bill, 2015. The Bill intends to regulate interest rates that are applicable to banks’ loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits.
In line with the Constitution of Kenya the Bill was presented to me, for appropriate action as required by law.
Since receiving this Bill, I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks. These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns.
This is the third time that the National Assembly is attempting to reduce interest rates to affordable levels. In the previous two instances, dialogue and promises of change prevailed and banks avoided the introduction of these caps. In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates.
Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.
Upon weighing carefully all these considerations, on balance, I have assented to the Bill as presented to me. We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms.
We will closely monitor these difficulties, particularly as they relate to the most vulnerable segments of our population. Whilst doing so, my Government will also accelerate other reform measures necessary to reduce the cost of credit and thereby create the opportunities that will move our economy to greater prosperity.
We recognize that banks have done much in the last decade in terms of innovation and promoting financial inclusion and look to their doing more in that direction.
We also reiterate our commitment to free market policies in driving sustainable economic growth, to which we owe much of our success”
There was intense lobbying by banks, but the president heard the common citizens more than the banks, which have exploited Kenyans to the bitter end.
Now, after the signing of the bill, this is what the banks are planning to do:
- To downsize their workforce
Since 70 % of the profits earned by banks come from interest rates, some of them are planning to retrench some workers since the profit margins will significantly reduce.
- To be more innovative
Several banks are planning to have real estate products, insurance products and many other products that are traditionally not welcome in the banking sector.
- To lock out small borrowers
Some banks are planning to give loans to individuals who borrow in volumes, meaning that small borrowers will be locked out. To do this, the banks are planning to make it hard to obtain loans unless you have saved a lot of money with them.
- To acquire SACCOs and microfinance institutions
Since SACCOs and microfinance institutions are not regulated currently, some banks will have to acquire them so that they can extend their habit to such institutions.
- To make it mandatory for customers to pay their loans within a very short time
If you used to pay a loan for 4 years, now you’ll be required to pay the same amount for at most two years.