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Financials

UPDATE 2-Kenyan central bank chief opposes calls to cap lending rates

* Says plan to cap commercial rates will be “harmful”

* Assures on banks’ rising bad debts, executives’ s exit

* Says Brexit a big risk to the economy (Updates with more details, Chase Bank Kenya)

NAIROBI, April 6 (Reuters) - Kenya’s central bank governor said inflation could fall further in coming months and that a proposal by lawmakers to cap commercial lending rates would be “extremely harmful”.

With bad debts surging, Kenyan legislators are pushing a law through parliament aimed at capping commercial banks’ lending rates at 4 percentage points above the central bank’s benchmark rate.

“We see this (proposal) as extremely dangerous because it will be harmful to the economy and ineffective,” Governor Patrick Njoroge told a news conference.

Businesses often complain that high commercial lending rates, often around 18 percent or more, stifle corporate investment. Individuals say high rates put borrowing for home loans, for example, out of reach for many.

Njoroge said commercial banks’ lending rates still needed to come down, adding they were looking to introduce an interest rate corridor by the end of this year to try to ensure that official rate decisions prompted lenders to adjust the rates they offer customers accordingly.

The central bank rate (CBR) will remain the main anchor for all lending rates but will use tools such as mopping up liquidity to keep the interbank rate within a set corridor close to the CBR, he said.

“Those policies that we are going to put in place will actually deliver a properly functioning financial sector,” he said.

High interest rates in the fourth quarter of last year pushed up the industry’s gross non-performing loans to 6.8 percent of the total in February, from 5.7 percent in the same month last year, amid increased defaults.

That in turn forced banks to increase their provisions for bad debts.

The chief executive of National Bank, Munir Ahmed, was put on compulsory leave last week, as loan loss provisions pushed the bank into a loss for last year. The bank’s board said this did not mean there had been any offence.

Chase Bank Kenya, a privately owned lender, said on Wednesday its chairman, Zafrullah Khan, and group managing director, Duncan Kabui had left the bank. It declined to give reasons for the departures, adding to anxiety over the sector.

Njoroge said higher provisioning for bad and doubtful debts by banks was a positive development.

“You should not view this as a systemic problem,” he said.

He said inflation would be driven by lower food and oil prices, adding the main risks to the Kenyan economy were external, such as Britain’s referendum in June on whether to stay in the European Union or not. (Editing by George Obulutsa/Ruth Pitchford)

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