Opponents of the interest rate cap are elated following the decision by the Kenyan President, Uhuru Kenyatta, to recommend to the National Assembly that the interest rate cap law be repealed.
In a memorandum from the President to the National Assembly which we have seen, the President has refused to assent to the Finance Bill, 2019 (the Bill) and recommended the deletion of clause 45 of the Bill, which proposed to retain the interest rate cap with slight modifications to comply with the March 2019 High Court ruling that declared the interest rate cap law ambiguous. The President has proposed that clause 45 of the Bill be substituted with a new clause that removes the interest rate cap.
The Interest rate cap was introduced on 14 September 2016 through section 33B of the Banking Act (Cap 488 laws of Kenya) and caps interest chargeable by banks on loans, to not more than four per cent. (4%) the base rate set by the Central Bank of Kenya (CBK).
Exercise of Constitutional power
The President has invoked Article 115 of the Constitution of Kenya to reject the Bill on reservations that the interest rate cap has caused unintended effects that are significant and damaging to the Kenyan economy. The President has supported his reservations by referring to recent studies which- in the President’s words- show that the interest rate cap has led to:
- reduction of credit to the private sector particularly to micro, small and medium enterprises;
- decline in economic growth;
- weakening of the effectiveness of monetary policy formulated and implemented by CBK;
- reduction of loan advances by (small) banks;
- the increase in shylocks and unregulated lenders who lend in a predatory manner at exorbitant rates;
- decrease in diversity of loan products; and
- disproportionate lending across various sectors of the economy determined by size of borrowers.
In the President’s view, findings from these studies prove that the interest rate cap has not achieved its intended objective; namely, addressing concerns about affordability and availability of credit. It appears to us that Treasury and the CBK hold similar views to those of the President based on the press pronouncements that the CBK Governor, Dr. Patrick Njoroge, has been making.
What happens after Presidential referral of a bill?
Once the President refers a bill brought to him for assent back to the National Assembly like he has done with the Bill, the National Assembly may either:
- consider the President’s reservations and amend the bill accordingly; or
- disregard the President’s reservations and pass the bill by way of a vote supported by two-thirds of members of the National Assembly either (i) without amendments or (ii) with amendments that do not necessarily accommodate all reservations by the President.
Which way will the Bill go? Be on the lookout.
If you have any queries regarding the interest cap law and the financial services practice area generally, please do not hesitate to contact Peter Mwaura at firstname.lastname@example.org. Please note that this e-alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.