This archive report was first published on 7 November 2019.
On November 7, 2019, the interest rate cap was a topic of heated debate in Kenya. The cap had been introduced in the Banking Act, but its impact on the economy was still being felt.
Some quarters, including the banking sector, the Treasury, IMF, and economist pundits, saw the introduction of the rate cap as a populist approach. However, financial consumers praised the government, saying 'Banks should finally be tamed!' This sentiment was not far from the truth.
The Consumer Federation of Kenya and the High Court were also involved in the debate. The High Court was tasked with determining whether the rate cap had deprived the Central Bank of its exclusive constitutional mandate under Article 231 (2) to formulate and implement monetary policies.
The court ruled that while the Central Bank had the mandate to set interest rates, the introduction of the rate cap was not a function of monetary policy. Therefore, the National Assembly had the presumption of constitutionality, and the rate cap did not offend the Central Bank's mandate.
However, the President declined to assent to the Finance Bill, citing the consequential impact of the interest rate cap on economic growth and credit accessibility to the private sector, particularly Micro, Small and Medium Enterprises (MSMEs).
Interestingly, the government's local or domestic borrowing was not mentioned as a factor in the economy's growth. In fact, the money channeled for the private sectors ended up being given to the government, starving the private sector and households.
The emergence of shylocks and other unregulated lenders in the credit market was another reason the Finance Bill was sent back to Parliament. These lenders took advantage of the capped interests to offer alternative credit to MSMEs at exorbitant rates.
The proliferation of unregulated credit lenders has caused more harm than good to the economy. To tame these lenders, it is essential to expand the banks' credit access, making it easily accessible and cheaper to low-income earners, SMEs, and reducing bureaucratic processes.
