* Rate cap protested by banking community
* Cap has slowed bank lending to small businesses
* Budget deficit reduced for first time in years (Adds details on Kenya budget, Uganda and Tanzania)
By Duncan Miriri
NAIROBI, June 14 (Reuters) - Kenya’s Finance Minister Henry Rotich on Thursday said he would propose repealing a cap on commercial lending rates, a move cheered by bankers who had said the ceiling had hurt credit growth and access.
The surprise move was announced by Rotich as he presented a budget for the 2018/19 (July-June) fiscal year that included a new tax on financial transactions.
Private sector credit growth slowed sharply after lawmakers limited the amount of interest commercial banks can charge customers at four percentage points above the central bank rate.
The International Monetary Fund has demanded the cap be repealed as a condition for Kenya to access its balance of payments support.
“I propose to amend the Banking Amendment Act 2016 by repealing section 33b of the said act,” he said, referring to the section of the law that sets the cap on interest rates for commercial lenders.
“This is to enable banks and lenders to provide more credit, especially to the borrowers they consider riskier,” he said.
The government introduced the cap because it said lenders had failed to pass on the benefits of growth in the industry to the broader economy by lowering their rates.
However, the cap has been blamed for the slowdown in lending, especially to small and medium enterprises as banks shied away from lending to borrowers considered risky.
“Anything that moves away from the current framework we have of the interest rate cap is a positive move, it’s definitely a welcome development,” said Jibran Qureishi, regional economist for East Africa at Stanbic bank.
The government faces a challenge pushing through the repeal as lawmakers who strongly backed the cap still oppose its removal.
“It’s a popular bill despite the detrimental impact... you could see there was clearly some disillusioned members in the house, it was very notable, it’s not going to be a walk in the park,” Qureishi said.
The minister targeted a budget deficit of 5.7 percent of GDP for the financial year starting next month, less than the 7.2 percent budgeted for 2017/18.
He projected tax revenues to rise by 17.5 percent to 1.9 trillion Kenyan shillings ($18.81 billion), equivalent to 20 percent of GDP.
He read out a lengthy list of proposed tax measures, which he said were designed to generate an extra 27.5 billion shillings in revenue during the period.
“I propose to introduce a Robin Hood tax of 0.05 percent of any amount of 500,000 shillings or more transferred through banks or other financial institutions,” he said.
The government of the East African nation has been criticized in recent years, including by the International Monetary Fund, for ramping up borrowing for infrastructure investments, including a new railway completed last year.
It was the first budget deficit reduction in years.
Rotich said he was withdrawing an earlier proposal to introduce a higher tax bracket of 35 percent for individuals earning more than 750,000 Kenyan shillings per month, after members of the public raised concerns.
The current rate is 30 percent for the highest earners.
In neighbouring Tanzania and Uganda, where the finance ministers also presented their budget proposals on Thursday, growth was also set to rise, they said, with Tanzania posting the highest projection at 7.2 percent.
The governments also proposed significant borrowing to fund their spending, with Rwanda proposing to borrow externally.
$1 = 101.0000 Kenyan shillings Additional reporting by Kevin Mwanza, John Ndiso Elias Biryabarema in Kampala and Fumbuka Ng'wanakilala in Dar es Salaam Editing by Maggie Fick and Jon Boyle