LDN - Business

Kenya's president refuses to sign the budget over rate cap

[October 17, 2019]

By George Obulutsa and Duncan Miriri

NAIROBI (Reuters) - Kenyan President Uhuru Kenyatta has demanded that lawmakers remove a cap on commercial lending rates, refusing to approve the 2019/20 (July-June) budget unless the limit is lifted, a document sent to parliament from the presidency showed on Thursday.

The move was the latest in a running dispute over the rates cap, which the government and banking officials say is debilitating to the economy because it stalls lending.

In 2016, the government limited rates banks can charge customers to four percentage points above the central bank's benchmark - currently 9% - saying they were concerned about high rates.

Last month, lawmakers rejected a June request by the Treasury to remove the cap, saying lenders had not proven they could be trusted to lower rates without pressure.

The move was the second attempt by the government to repeal the cap after a similar try last year was blocked by lawmakers.

"The capping of interest rates has not addressed the intended objective particularly in expanding credit access," Kenyatta said in the note to parliament.

Kenyan bank shares surged on the Nairobi bourse after the news.

The cap has cut private sector credit growth as commercial banks cut off millions of low-income customers deemed too risky to lend to, government officials and bank executives say.

It has also had a knock-on effect on the real economy as credit-starved businesses lay off workers and real estate developers find it hard to sell homes to a credit-short market.

"Investors will react positively to this news, in light of the harmful effects of the loan rate cap on Kenya's growth prospects, and the unnecessary complication that it creates for policy," said Razia Khan, head of research for Africa at Standard Chartered in London.

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Kenyan President Uhuru Kenyatta addresses the 74th session of the United Nations General Assembly at U.N. headquarters in New York City, New York, U.S., September 25, 2019. REUTERS/Eduardo Munoz/File Photo

The central bank, which found in a study last year that the cap had probably cut 0.4% from 2017's economic growth, has complained that the cap has also made it hard it to transmit its monetary policy signals.

It takes an average of 3-5 months longer for policy decisions to be transmitted under the capping regime compared with a free interest rate regime, Kenyatta said, citing research by the central bank.

Loansharks and other unregulated lenders have seized advantage of the gap created by the cap, charging desperate borrowers exorbitant rates, he said.

Lawmakers have the option of removing the cap from the bill or overruling the president if two thirds of the 349 members vote to override his position, said Aden Duale, parliament's majority leader.

"The house will deal with the matter in the next two weeks and will make a decision," Duale told Reuters.

Legislators who spoke to Reuters said it was too early to tell how the house will vote but some agreed with the president.

"I’m in favor of repealing the cap. This cap is a just a decoration, just a feel-good thing because we cannot get credit from banks. I’m also a businessman," said Moses Kuria, a lawmaker from Kenyatta's ruling Jubilee party.

(Editing by Frances Kerry)

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