Repealing of interest rate cap in the country has culminated into a warning by Central Bank of Kenya (CBK) on low returns to bank owners.
Speaking during the launch of the International Monetary Fund (IMF) on regional outlook for Sub-Saharan Africa on October 28, CBK Governor Dr. Patrick Njoroge said there’s a guarantee for cheap credit as the country prepares for the repeal of the interest rate cap.
“Bank shareholders should be more accepting of lower returns. Return to equity needs to come down, it has already started going down,” said Njoroge.
With the rate cap still in place, banks have been able to make increasing profits, with most of them using technology to reduce costs of operation, lending more to the public sector and cashing in on non-funded income.
According to data by the Central Bank of Kenya (CBK) Commercial banks’ profit before tax for the first four months of 2019 rose by 15 percent to Sh56.8 billion up from Sh49.4 billion on increased lending,
The regulator’s report indicated that customer deposits shrunk slightly to Sh3.37 trillion from Sh3.4 trillion as at March.
Cumulative loan book for the sector grew to Sh2.6 trillion, the highest point in the country’s history, buoyed a relatively calm economy.
The jump in earnings came at a time when credit growth to the private sector improved to 4.9 percent, the highest level since introduction of the rate cap law that has dragged economic growth by stagnating cash lent to businesses at below 4 percent, against the recommended 12 percent.
However, on October 29, National Assembly Finance and National Planning Committee’s threw in the towel, effectively hauling small and medium enterprises and ordinary Kenyans under the bus when they sided with President Kenyatta to repeal interest rate cap, a day after the Governor’s warning.
This follows Mr. Kenyatta’s move which saw him revert the Finance Bill 2019 to parliament detailing his reason for refusal to sign into law the bill.
The MPs, however, want President Kenyatta’s memo to be amended so that those who are already servicing old loans under the repealed regime would not be affected.
“Notwithstanding the repeal of section 33 B, any agreement or arrangement to borrow or lend which was made or entered into…shall continue to be in force on such terms, including interest rates and for the duration specified in the agreement or arrangement,” the report tabled in the House Tuesday, proposes.
The head of state rejected the 2019 Finance Bill through the Central Bank of Kenya and the National Treasury’s argument that the rate cap was hurting the economy.