Kenyan Banks Commit to Cutting Rates as Lending Limit Looms

  • Lenders ask president to hold off on signing new bill into law
  • Government must get ‘act together’ on borrowing, KBA says

Kenyan banks have committed to lowering their lending rates after lawmakers proposed imposing a limit on how much interest can be charged.

Lenders in East Africa’s biggest economy signed a memorandum that sets out measures to boost lending, including allocating 30 billion shillings ($295 million) to small- and medium-sized enterprises and women at concessionary rates, Lamin Manjang, chairman of the Kenya Bankers Association, said Wednesday. Banks will also enhance their business models to reduce rates, he told reporters in the capital, Nairobi.

“The memorandum can be monitored and banks can be held accountable,” he said. “It is not a legally binding document, but when you make a commitment to the regulator, it shows commitment.”

Kenyan lawmakers last month passed a bill that proposed setting a cap on commercial lending rates at four percentage points above the benchmark central bank rate. Kenya’s financial authorities have repeatedly asked lenders to reduce their loan charges to stimulate demand for credit.

Request to President

Commercial lenders 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 lending rate will fall by 100 basis points by the end of the month as banks follow the reduction in the Kenya Banks’ Reference Rate, or KBRR.

“We ask the president not to assent to the bill in light of the memorandum,” the association’s chief executive officer, Habil Olaka, said. “The referral of the bill back to parliament will allow for dialogue and review.”

At the same time, banks are calling on the government to “get its act together” by not borrowing too much in domestic debt markets, he said. According to data from the International Monetary Fund, the ratio of government debt to overall credit stands at 70 percent, signs that the government is crowding out the private sector and contributing to the high cost of credit in the market, Olaka said.

There also needs to be more discipline with Treasury bill yields to ensure interest rates remain low and stable, the association’s Manjang said. Rates fell to 2 percent in the early 2000s when the government and central bank reduced borrowing.

“So what do banks have to do when the alternative is 2 percent on a T-bill?” Manjang said. “You lend, and as you are all trying to lend, you compete and you get rates moving in the right direction.”

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