Banks set aside Sh30bn for SMEs as calls for capping rates mount

What you need to know:

  • The lenders say they will effectively reduce the interest rates and notify their clients of the same immediately in line with the Kenya Bankers Reference Rates (KBRR).
  • They have also proposed a raft of initiatives that will see the cost of loans come down including risk-based lending that will see credit scoring of loan borrowers adopted.

Panicked bankers have reacted to the proposed capping of interest rates by pooling Sh30 billion to lend to small and medium sized enterprises at friendly interest rates in hopes of abating public wrath.

In a memorandum signed by chief executive of all commercial banks and presented to the Central Bank governor, the lenders pledged to contribute to the fund based on their lending to small businesses.

The CEOs are lobbying against a Bill, passed by Parliament and forwarded to President Uhuru Kenyatta for assent, which proposes to cap their lending rates and put a floor to what they pay for savings.

Banks fear that in case the President rejects the Bill, parliamentarians may veto his decision and marshal two-thirds support for a popular amendment forcing Mr Kenyatta’s hand on the matter.

The lenders have formulated a raft of measures, including creation of the fund, in an effort to appease the parliamentarians and keep the new regulations at bay.

The funds will be lent out at below 14.5 per cent which will be the ceiling rate if the Bill is assented by the President immediately.

“The banks will also set aside Sh100 million to give technical assistance to micro, small and medium sized business which will enable them secure financing,” said Kenya Bankers Association chief executive Habil Olaka.

Banks pledged to cut their interest rates by at least one percentage point immediately to pass on the cut by CBK on the standard base lending rate of the industry, the Kenya Banks’ Reference Rate (KBRR).

The bankers cancelled bank closure charges, dubbed a nuisance fee by the CBK, in an effort to ease movement of customers across lenders.

The cancellation is inconsequential in the debate on interest rates as the cost of moving a loan remains high, hampering movement to cheaper lenders.
KBA blamed the government for the high cost of transferring debt, noting that the Treasury pocketed most of the charges involved in the transfer process such stamp duty.

Central Bank governor and the bankers failed to address the issue of domestic borrowing by the government which is seen as the anchor to the high interest rate regime.

Banks will continue lending to the private sector at high interest rates so long as they have the alternative of giving the money to a cash-hungry government that is paying upwards of 10 per cent.

Lenders have to factor the opportunity lost to extend credit to the government who is considered as a risk-free borrower.

The Bill passed by Parliament also ignores the role of the Treasury in the high interest rate regime and puts the burden on banks.

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