This archive report was first published on 17 October 2019.
On October 17, 2019, President Uhuru Kenyatta rejected the Finance Bill of 2019, which aimed to retain the interest rate cap, paving the way for its potential repeal.
The bill, which was passed by Parliament, would have restricted banks from lending at rates above the Central Bank of Kenya's (CBK) benchmark. However, the President's rejection of the bill has given the CBK governor, Patrick Njoroge, hope that policymakers will choose to repeal the interest rate cap.
According to Bloomberg, Njoroge expressed optimism that Parliament would not muster the two-thirds majority needed to override the President's veto, saying, "It is improbable that Parliament will come up with two-third votes. We believe that we are in a position to overturn the interest rate caps."
Interest Rate Cap Repeal to Boost Credit Access ¶
The interest rate cap, which was introduced in 2016, restricted banks to a 4-point spread from the CBK's benchmark. While the initial intention was to improve lending terms for borrowers, the cap had the unintended consequence of restricting lending to small and medium-sized enterprises (SMEs), as banks became risk-averse.
With the potential repeal of the interest rate cap, banks are expected to increase lending to the private sector, leading to economic growth and improved access to credit for SMEs.
"If you want small and medium enterprises to continue strengthening to employ people, you have to let go of these interest rate caps," Njoroge added.
However, critics argue that the President's move poses a threat to consumer protection, as it could lead to banks taking advantage of consumers. In response, the CBK governor assures Kenyans that banks are moving towards customer-centric models and will uphold the interests of consumers.
