Kenyan lawmakers escalate battle against banks to cap rates

Kenyan lawmakers are willing to overrule President Uhuru Kenyatta if needed to force the country’s banks to lower their lending rates.

The country’s parliament on July 28 approved a bill that will limit the amount of interest banks can charge on loans, with the proposal only needing Kenyatta’s signature to become law. The proposals jolted lenders into signing a memorandum of understanding with the Central Bank of Kenya that commits them to cutting interest charges.

“The president has 14 days to sign the bill into law, failure of which it automatically becomes law,” Jude Njomo, a legislator who campaigned for the legislation, said in an interview in the capital, Nairobi. “If he rejects it, we will use our two-thirds majority in parliament to pass it.”

The pledge from the country’s lenders is not legally binding and is a “public relations gimmick by banks, which want to continue fleecing Kenyans,” he said. Banks urged Kenyatta not to sign the bill and pledged 30 billion shillings ($295 million) of lending facilities to small- and medium-enterprises at reduced rates, Lamin Manjang, chairman of the Kenya Bankers Association, said on Wednesday. Banks can be held accountable as the memorandum can be monitored and also shows a commitment to the country’s regulator, the association said.

August Decline

Lenders in East Africa’s largest economy extended loans at a weighted average rate of 18.3 percent in May, according to the most recent statistics from the central bank, whose key rate was kept at 10.5 percent at a Monetary Policy Committee meeting on July 25. The new law will cap commercial interest rates at 400 basis points above the Central Bank of Kenya benchmark rate.

Lending rates are expected to fall by 100 basis points by the end of August as banks comply with a reduction in Kenya Banks Reference Rate, the banking association said.

The issue of lower rates forms part of the manifesto of Kenya’s governing Jubilee Party, which have the majority and will use it if “push comes to shove,” Njomo said. The Jubilee Party consists of Kenyatta’s National Alliance and Deputy President William Ruto’s United Republican Party

Any cap on lending rates will result in a drop in stock prices, Nairobi Securities Exchange Chief Executive Officer Geoffrey Odundo said in an e-mailed statement Friday. Eleven lenders’ shares are traded on the bourse. Most lenders have declined since parliament passed the bill at the end of last month, with only KCB Group Ltd., the nation’s biggest bank by assets, gaining over the period.

“Capping of interest rates may negatively impact this sector with a knock-on effect of dampening broader stock market valuations,” Odundo said.