The MP proposes the introduction of risk negotiation window of up to 6 per cent above the lending cap for SMEs and unsecured Individual customers.
Gatundu South MP Moses Kuria tabled a bill in Kenya’s parliament proposing the amendment of the interest rate cap where interest rates will be raised by a margin to accommodate Kenya’s Small and Medium Enterprises (SMEs). The legislator wants risky borrowers to pay six percentage points above the current 13.5 per cent cap. The borrowers will also be able to negotiate pricing based on their risk profile on a willing buyer, willing seller basis.
According to the legislator in a letter addressed to the speaker of the national assembly, the rate cap which was implemented in 2016, had the effect of a ballooning domestic debt as Treasury’s debt appetite continues unabated. The spiralling debt is the single most threat to our (Kenya) economy and its distorting all fundamentals. In the proposal the legislator also wants the interest rate cap to be raised by a margin to accommodate Kenya’s SMEs. Currently, the law caps the rate to 4 per cent above the CBR. However, consumer lobby group, the Consumer Federation of Kenya (CoFEK) dismissed the legislator’s proposal saying that it would open doors for banks to shun SMEs.
Cofek Programmes Officer Onesmus Mutungi was quoted by the Standard newspaper saying “The fact that the government has to raise the huge budget deficit from the domestic borrowing means that even if caps were removed, the banks will prefer to lend to the risk-free government than lend to individuals or SMEs,” Lending to SMEs post the 2016 interest cap implementation had declined with banks shunning SMEs whom they consider as risky lenders.
According to Central Bank Kenya Credit Survey, 51 per cent of financial institutions polled indicated that interest rate capping negatively affected their lending to Small and Medium Enterprises (SMEs) whereas 49 per cent of the respondents indicated that they had experienced a positive effect on the same. Analysts at Apex Africa Capital Ltd, a brokerage house based in Nairobi, however, say that the proposed law amendment is geared towards rejuvenating private sector credit growth as lenders imposed a freeze on lending owing to the biting rate cap. “The bill is expected to revive investor interest in the banking sector whose future growth prospects remain uncertain.”