This archive report was first published on 9 December 2019.
On December 9, 2019, Central Bank of Kenya Governor Patrick Njoroge issued a stern warning to commercial banks, ordering them to change the terms of all existing loans into fixed rates. This move is aimed at shielding customers from exorbitant interest rates while also preventing banks from revising interest rates upwards for credit facilities entered into while the interest rate caps were in force.
The repealed law, which was in place since September 2016, had capped interest rates at four percentage points above the Central Bank Rate (CBR). However, with the rate cap now gone, banks are left to determine their own interest rates, leading to a tense confrontation between Governor Njoroge and the banks.
According to a Smart Company poll, several top banks refused to give their position on how they would price their loans. Dr. Njoroge, who has reiterated his enthusiasm about the consumer, now faces the test of shielding customers from exorbitant interest rates while at the same time not appearing to interfere with market pricing.
CBK has ordered all bank executives to submit monthly capped interest returns from November 7 when the cap was repealed, monthly data on new loans, and customer complaints by January 10 next year. The regulator also wants banks to demonstrate how they will implement the Banking Sector Charter (BSC), which includes using information from Credit Reference Bureaus to give rates based on risks and not use a flat rate.
However, the price of government borrowing is likely to be the biggest determinant of lending rates, given that banks compete with the National Treasury for deposits in the market. Out of the Sh2.9 trillion domestic state debt, banks hold 54.2 per cent, pension funds hold 27.9 per cent, while insurance companies hold 6.4 per cent.
Already, banks' bids have pushed up the 91-day bond from 6.4 per cent at the end of October to 7.2 per cent last week, 182-day bill from 7.2 per cent to 8.2 per cent, and 364-day from 9.7 per cent to 9.8 per cent by reducing demand, with last week's average bids clocking to 34 per cent to attract a premium.
