UPDATE 2-Kenya's president finalises removal of rate cap for banks

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NAIROBI, Nov 7 (Reuters) - Kenya’s President Uhuru Kenyatta has signed a law that scraps a cap on banks’ commercial lending rates which had been blamed for stalling lending to businesses, his office said on Thursday.

The government and the country’s banks had blamed the cap, which the government imposed in 2016 to curb high interest rates, for constricting private sector lending growth and reducing the effectiveness of monetary policy.

Last month, Kenyatta refused to sign the government’s budget for this financial year, demanding the cap be removed.

His amendment to the budget was passed by parliament on Tuesday after lawmakers who opposed it failed to secure the required two-thirds majority needed to override the veto.

The Kenya Bankers Association has said at least 1 million “risky” customers were shut off from credit when the government imposed the cap, which limits commercial rates to within 4 percentage points of the central bank rate, currently 9%.

Lending to small and medium-sized businesses has dropped by 1.9 trillion shillings ($18.50 billion) since the cap was imposed, the association said.

Besides boosting credit flow to businesses, lifting the cap is also expected to help unlock a stand-by credit facility with the International Monetary Fund, once the government shows sufficient commitment to closing a gaping fiscal deficit.

“The cap’s removal, which had been a precondition for the renewal of the IMF’s credit facility, along with fiscal consolidation, is the strongest indication that the administration is prioritising the IMF credit facility,” Eurasia Group said in a note.

The East African nation has been discussing a new stand-by credit facility with the Fund after its previous facility expired last year.

Kenyan assets, including stocks and the shilling currency , rallied in recent weeks as it became clear the cap would be lifted.

Under the law passed by parliament, existing loans will be shielded from an increase in interest rates, for the duration already agreed on between the lenders and borrowers.

KCB Group, Kenya’s biggest lender by assets, said the industry was not likely to return to the era of very high lending rates which had brought about the cap.

“The macroeconomic and business environment where we are today does not at all support an environment of high rates,” Joshua Oigara, the group’s chief executive, said in a statement.

$1 = 102.7 Kenyan shillings Editing by Catherine Evans