Kenyan banks need to lower their “remarkably high” interest rates and make a “credible down payment” to borrowers, central bank Governor Patrick Njoroge said.
While a proposed law limiting how much lenders can charge for loans is misguided, banks still need to do more to cut their rates so the benefits of a well-functioning financial system reaches customers, he said in a statement published on the central bank’s website.
Lawmakers in the $61-billion economy on July 28 approved a new regulation that caps commercial interest rates at 400 basis points above the central bank’s benchmark rate, which currently stands at 10.5 percent. The move has unnerved the industry, which has warned interest-rate limits will dry up credit and encourage unregulated lending.
The Central Bank of Kenya “has asked banks to make a credible ‘down payment’ to their customers, thereby allowing the reforms underway to take root and sustainably reduce the cost of credit,” Njoroge said, without giving more details on what such a payment would entail. “Appropriate responses by banks require courage and hope for the future, not mistrust and caution.”
While the central bank has reduced its key policy rate by 100 basis points in the last 12 months, the average commercial lending rate has increased to 18.2 percent from 15.8 percent in July 2015. The spread between borrowing and deposit rates, at 11.4 percent, is high, Njoroge said. Reforms are underway, such as improving the credit reference system, establishing a collateral registry and implementing an annual percentage rate that reflects the actual cost of borrowing.
The amendment to the banking bill also seeks to set a minimum interest rate for deposits in interest-earning accounts at 70 percent of the central bank rate.
Banks raise lending rates quickly in response to market conditions, but are slow to reduce them when the environment improves, Njoroge said, adding that there are concerns about non-interest charges that conceal the real pricing of loans and other bank products.
President Uhuru Kenyatta is yet to sign the proposed legislation into law and has said he’ll consult “extensively” before making a decision. The nation’s main opposition party, the Coalition for Reforms and Democracy, has urged Kenyatta to assent to the law.
Reinstating interest rate controls that were abolished in July 1991 would hurt both business and individuals, the central bank governor said.
“This is the time to pause and adjust course, allowing ongoing reforms to yield results,” Njoroge said. “We cannot afford a collision, the cost of which would be borne disproportionately by the most vulnerable.”