Empowering African Businesses

Kenyan banks sign MoU ‘rejecting’ low interest rates

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By Ben Oduor 

The Kenya Bankers Association (KBA) Wednesday presented a Memorandum of Understanding (MOU) to Central Bank of Kenya (CBK) seeking to stem interest rate capping legislation.

This follows weeks of debate and the passing of a parliamentary Bill that seeks to cap loan rates. The bill is currently awaiting Presidential assent.

In what looked like an attempt by the banks to offer a remedy that counters the legislation, the MOU by KBA provides guidelines and seeks to offer solutions to the interest rate debate while still retain free market space enjoyed by the private sector.

The memorandum commits that banks will reduce rates and notify their customers in line with the Kenya Bank’s Reference Rate (KBRR), drop the customer account closing charges in order to make it easier for customers to shop around and transfer accounts from one bank to another.

The banks also reiterated readiness to allocate sh30 billion to enhance financial access for SMEs, from which sh10 billion would be allocated to women and youth-owned micro enterprises, with the fund’s lending rates being concessionary and not exceeding 14.5 per cent.

Also, it notes that banks shall commit to set up a sh100 million technical assistance program for micro, small and medium-sized enterprises, whose implementation will be overseen by a governance framework that includes sector stakeholders.

The document also notes that banks will use the credit reference bureau framework, together with the product type and loan tenors to start classifying their borrowers into the categories of low, medium and high risk in a bid to reward low-risk borrowers with lower interest rates.

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And to enhance ethics, governance and banking practices, the industry will work with KPMG, an independent audit and assurance firm.

KBA CEO Habil Olaka said the memorandum also proposed other initiatives that the government and private sector should continue to work in a bid to lower the cost of credit and enhance financial literacy and consumer protection.

He also urged the President to refer the bill to parliament saying the move “will offer more room for dialogue and reason whose outcome will be mutually beneficial to all stakeholders in the sector.”

On the other hand, KBA chairman Lamin Manjang said: “The proposal to cap interest rates and set a floor on deposit rates has a very noble objective, but in practice it has ended up with very adverse consequences. Some other countries have tried this before, and evidence shows that in such countries the ratio of credit to GDP is lower than the regional average. Such countries also have lower levels of financial inclusion indicators.”

The MOU, which Mr. Manjang said was signed by all banks, was submitted to the CBK Governor- Dr. Patrick Njoroge.

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