Before President Uhuru Kenyatta took his chair at State House Nairobi to sign the controversial Bill capping interest rates on Wednesday, he took time to explain to the public why he had taken the unorthodox step of taking Kenya’s financial services sector back to a price controls regime.
Commercial banks had only waged propaganda war against the people of Kenya whenever the issue of high interest rates was raised with little gains accruing to ordinary borrowers, the president said in a statement sent from his office.
Mr Kenyatta further argued that the banks had in the past reneged on pledges to lower rates and continued to inflict immense economic pain on productive sectors of the economy.
But some observers have pointed to the fact that the president’s action was mainly driven by politics – this being an election period during which he will have to account for the promises he made to the voters in 2013.
Low cost of credit was one of the key promises made to the voters four years ago and it was going to be difficult to approach the same electorate with different promises relating to their finances having failed to deliver on this.
“There was no political mileage to be gained from rejecting the Bill on interest rate caps and so the president chose to do what was politically popular,” argued Jaindi Kisero, a veteran journalist and public policy analyst.
That argument is supported by the fact that Mr Kenyatta signed the Bill despite the fact that his government – through its profligate spending that is mainly supported by heavy domestic borrowing – is the biggest contributor to the high interest rates regime in Kenya.
As one observer starkly put it to Mr Kenyatta on Wednesday evening, “your government not only capped interest rates but also borrowed Sh18.3 billion by selling a 10-year bond at an average yield of 15 per cent on the same day.”
This, he went on, literally amounts to setting the 10-year risk free rate at more than 15 per cent and expecting banks to lend to risky businesses and individuals at 14.5 per cent – a mind boggling expectation.
Parliament, which passed changes to the banking law to cap commercial interest rates at 400 basis points above the central bank’s policy rate, now 10.5 percent, has not fared any better.
This is because Kenya’s 2010 Constitution gives parliamentarians immense powers over the management of public finances, including limiting how much the government can borrow, at what price and for what purpose.
This argument points to the fact that were MPs bent on finding solid and lasting solutions to the high cost of credit, they would have targeted rampant government borrowing from the domestic market – which at the current average lending rate of 18 per cent accounts for more than half (10.5 per cent) the overall pricing of credit.
Instead, the legislators chose the populist path of framing the banks as villains who are not ashamed of raking in abnormal profits at the expense of poor and struggling Kenyans.
Mr Kenyatta, whose family owns one of Kenya’s top tier banks, made a similar argument in his statement pointing to the fact that the lenders continue to report some of the highest returns-on-equity in Africa, in spite of Kenya having one of the most efficient and effective financial markets on the continent.
Credit: Business Daily