The Commercial Bank’s Interest rates;….To cap ,or,not cap the interest rates that commercial banks do charge to their customers….

……..To cap,or,not cap the interest rates that banks do charge to the borrowers.This is the subject of discussions that’s causing ripples and panic in the financial markets after a Bill was passed in Parliament that wants to cap the interest rates that banks do charge to their customers.

The Bill only awaits the decision of the President to either accent it into law ,or,to veto it back to Parliament with amendments.A lot is at stake and the President will have a tight balancing act.

President Kenyatta hasn’t commented on it’s merits despite the raging debate on it’s merits ,led by Members of Parliament who supported it overwhelmingly and business community on the one hand ,and ,bankers opposed to it on the other .

The Bill proposes for the introduction of caps in the interest rates that banks do charge in accordance with the benchmark that is set by Central Bank of Kenya.That’s the interest rates must not exceed more than 4 percent in correspondence to the benchmark;not more than 14.5 percent.

According to Member of Parliament for Kiambu Town ,Jude Njomo,the sponsor of the Bill,said that he was responding to the cries of the innocent citizenry who are being devoured by commercial banks by surcharging high interest rates on them.So many Kenyans has had their life turned upside down and left desperate after banks auctioned all their properties to recover their monies.

That Parliament passed the amendments to the banking law on July 27th ,setting maximum lending rates at 400 basis points above the Central Bank’s benchmark rate ,which now stands at 10.50 percent .This fixes lending rates at 14.5 percent compared to the current average lending rate of 18 percent.

However,the resistance to the Bill’s passage by top government financial officials led by Treasury Cabinet Secretary,Henry Rotich,and,Central Bank’s Governor,Dr.Patrick Njoroge,may give an indication as to whether the President will append his signature ,or,reject the Bill considering that the two advise him on monetary policies.

The Members of Parliament ,led by the sponsor of the Bill,Jude Njomo,have said that the Bill is timely as it will go along way in helping Kenyans access cheap loans by capping the amount charged on interest rates at not more than 14.5 percent.

For quite along time commercial banks have often been accused of failing to lower the cost of borrowing even when the Central Bank’s cuts it’s benchmark rate.The commercial banks acts arbitrary in the whole management of loans and capping of interest rates .They charge high interest rates against the dictates of market forces ,while also putting into consideration that there are other side charges that are lumped together to the borrower .

Also,these interest rates keeps on fluctuating to their advantage and to the detriment of their borrowers of which they aren’t informed when interest rates fluctuates before hand.

And,to the borrowers,this Bill is timely and god sent for it will remove the burden of paying high interest rates to the banks.To the financial practitioners ,it has caused a lot of panic and uncertainty in the market which has llicited a clash of opinions with lobbying and counter-lobbying already in play.

The financial analysts and Kenya Bankers Association have warned against imposing caps on how banks lend to their customers ,and,prefer interest rates be left to the dictates of market forces.In particular,Kenya Bankers Association,maintains that legal controls of interest rates will not be the best option for the lending markets.

It believes that setting the interest rates will mean that banks will not be in a position to accommodate the risk of lending to small traders and the unsecured borrowers,hence pushing the small traders out of the lending market.

The financial experts also warned against the move to cap interest rates as this move will force banks to avoid giving loans to perceived risky borrowers who are mainly individuals and small and medium-sized businesses.

The Federation of Kenya Employers [F.K.E] also voiced it’s concern on interest caps warning that such a move will reduce activities in the banking sector.The move will hurt banker’s profits,eat into government taxes and deny credit to small borrowers.

The employer wants the government to address factors that influence lending rates such as reducing state domestic borrowing instead of capping interest rates.

But,in a rejoinder,the Institute of Certified Public Accountants of Kenya,believes that banks have operated on an “oligapolistic market mode where credit pricing is not reflective of market fundamentals”,hence the need for a ceiling .The accountants believes lenders will have the advantage of committing borrowers to what they can afford hence reduce default instead of having “naive and ignorant borrowers”agreeing to loan term to which they eventually default.


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