October 19, 2017 / 1:59 PM / a year ago

Kenyan bankers group urges repeal of rate cap, say it stifles credit

NAIROBI, Oct 19 (Reuters) - Kenya’s year-old cap on commercial lending rates should be amended or repealed because it has cut credit growth to firms and curbed the ability of small and medium-sized businesses to access credit, the bank industry association said on Thursday.

The Kenya Bankers Association (KBA) has significant clout when it comes to the formulation of banking policy.

The government capped commercial lending rates at 4 percentage points above the central bank’s benchmark rate in September last year saying banks had failed to pass on the benefits of growth in the industry to consumers.

Lenders reject the accusation saying the cap takes away their ability to give loans to risky borrowers. They also say the industry should be allowed to regulate itself.

The law also compels commercial banks and financial institutions to pay a minimum interest rate of 70 percent of the central bank’s benchmark rate, which stands at 10 percent, on deposits.

“There is enough evidence for the law to be repealed,” said Habil Olaka, the CEO of the KBA, citing a survey it carried out among lenders on the impact of the cap. There was no immediate comment from the government.

Private sector credit growth was 1.6 percent in the 12 months to August, the central bank said, well below the ideal growth rate of about 12-15 percent.

“The law has exacerbated the decline in bank credit to the private sector,” Olaka told a news conference.

Loan applications in the industry had fallen by 17 percent immediately the law came into force, while disbursement of approved loans in the industry declined by a third, the survey by the bank lobby found.

Some 1,933 jobs were shed by the industry from the time the cap was imposed to June this year, KBA said, adding there were 26,076 employees in the banking sector.

A draft government report on the impact of the cap is ready but the government has not released it yet.

The central bank, which favours an approach that allows banks to lower rates voluntarily, has said the cap has made it difficult to predict the impact of monetary policy.

But Jude Njomo, the legislator from the ruling party who sponsored the rate cap bill, said in September that parliament will throw out any bill aimed at altering the interest rate cap.

He said there was no evidence that banks would now voluntarily reduce their rates. (Reporting by George Obulutsa; Editing by Duncan Miriri and Matthew Mpoke Bigg)

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