Business Daily
Date: 04.04.2016
Page 9
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AVE: 237288.88
Consider pros and cons of interest rates
cap before passing banking Bill in haste
?law Stakeholders
should discuss interest
rates control to avoid
hurting vibrant sector
BY FERNANDES BARASA
The setting of interest rates is a proposed amendments to the Finance after the financial crisis.
main function of a central bank. Bill 2015. However, this did not go
The proponents of interest rates cap­
ping cite three main advantages of such
By raising or lowering short term through.
interest rates, or the cost of money, cen­
tral banks aim to affect the amount
spent and borrowed by businesses and
consumers.
Equally, the Central Bank of Kenya
(Amendment) Bill 2015 sought to amend
Section 36 of the CBK Act to compel
banks and microfinance lenders to cap
borrowing rates at five percentage points
above the central bank lending rate.
Such laws designed to prevent the
initiative.
First, interest rates caps can be used to
support a specific sector of the economy
where a market failure exists or where
there is need for more financial resourc­
As a consumer, higher interest rate
es. Such market failures often result from
influences your mortgages, equity loans,
credit cards and other borrowing initia­
information asymmetries and the inabil­
tives. As an investor, the impact of higher taking of "excessive" interest, have long ity of financial institutions to differenti­
interest rates depends on what types of been the subject of debate and controver­ ate between risky and safe clients.
investments you venture into. This af­ sy. While supporters of such legislation
Second, interest rate caps can be used
fects access to credit which is consid­ claim that such controls protect consum­
to protect consumers from exploitation
ered to be a main pillar to economic ers from abusive lending practices and by guaranteeing access to credit at rea­
development.
enable them to obtain loans at reason­ sonable rates. They also protect the pub­
There is currently a heated debate able rates, their opponents argue that lic interest by ensuring a fair and reason­
both in and outside Parliament on the they work to consumers' disadvantage able interest rate on loans.
effect of the Banking (Amendment) Bill by distorting financial markets.
Lastly, it has been argued out that
2015 to the economy.
According to a World Bank report dat­ because the prices charged for access to
The Bill as structured is aimed at ed October 2014, at least 76 countries use
providing a mechanism for regulation some form of interest caps.
of banks and financial institutions' in­
In sub Saharan Africa, interest rates
terest rates through the introduction of on credit are capped in 24
ceilings. The Bill proposes to put a cap countries. The main rea­
on the rate of interest charged for loans son for capping those rates
credit can be erratic and an­
ticompetitive and there­
fore be higher than the
true cost of lending, set­
ting a lower cap on inter­
est rates will provide an
and to fix the minimum rate of interest was to protect consumers
excellent environment
that such institutions must pay on de­ from high interest rates, to
posits held.
increase access to finance
for lenders to operate.
On contrary, allude to
The Bill further seeks to amend sec­ and to make loans afford­
a number of drawbacks
tion 33A of the Banking Act by introduc­ able. The World Bank pa­
related to interest rate
ing a new section which provides for in­ per posits that such sce­
terest ceilings, warning to the borrowers nario has varying effects
and sanctions to banks and financial in­ including withdrawal of
stitutions providing interest rates higher financial institutions from
than those prescribed by the law.
the poor or from specific
The issue of capping interest rates is segments of the market.
not new to Kenya. In 2000, the Donde
The global financial crisis of2008
capping. According to a
Bill tried to address the issue of interest pened the discussion on interest rates
rates but did not get much support from
stakeholders including banks.
Last year, there were fresh attempts
to cap bank interest rates through the
caps as an instrument for consumer
protection. As such countries such as
El Salvador, Zambia and Japan intro­
duced new interest rate caps in loans
paper, 'Effects of Usury
Laws', by Oren Rigbi in­
terest rate caps may affect credit markets
through numerous channels.
First, higher caps make lending to
higher risk borrowers profitable by ex­
tending credit to some borrowers who
were previously denied it.
Second, because the riskiness of a
loan depends on its size, and not just on
the identity of the borrower, higher caps
Ipsos Kenya ­ Acorn House,97 James Gichuru Road ­ Lavington ­ Nairobi ­ Kenya
Business Daily
Date: 04.04.2016
Page 9
Article size: 562 cm2
ColumnCM: 124.88
AVE: 237288.88
may cause a given borrower to request base rate is set by the Monetary Policy the amendment to section 31 of the Act
a larger loan. Third, higher caps may Committee quarterly in line with other to ensure that before granting a loan to a
increase the probability that borrowers economic conditions prevailing at the borrower, a bank or financial institution
default on loans, particularly if the caps time. The banks as in the case of US have shall disclose all the charges and terms
were preventing borrowers from agree­ good business ethics and, therefore, tend relating to the loan.
As we explore this route, let's also con­
ing to loan terms they could not manage to set the rates they charge to borrowers
very much in line with the base rate.
sider marrying it with other alternatives
financially.
Based on these arguments and les­ such as price transparency, consumer
In the United States, the base rate of
interest is set quarterly by the Federal
Reserve Bank. Because of good business
ethics and strong consumer protection
institutions, the banks are more disci­
plined and are inclined to behave as if
they are being capped. In the UK, the
sons from other jurisdictions, it would
be good for Parliament and other stake­
holders to consider the pros and cons
of price controls in any sector, and es­
pecially the interest rates since it is at
the core of Kenya's monetary policy. For
instance, one of the benefits if this Bill is
literacy, improve consumer protection
frameworks and availing of credit in­
formation to the public and potential
borrowers.
The writer is the national chairman,
Institute of Certified Public Account­
ants of Kenya.
MPs during a session at the National Assembly, file
Ipsos Kenya ­ Acorn House,97 James Gichuru Road ­ Lavington ­ Nairobi ­ Kenya
Donde Bill tried
to address the
issue of interest
rates but did
not get much
support from
stakeholders
including banks