Kenya Interest Rates Cap Repeal – Is there any way out?
Kenyan borrowers were in a celebratory mood when Parliament amended the Banking Act. The 2016 amendment introduced caps on interest rates. Subsequently, the Central Bank of Kenya issued a circular providing further guidance. The new legislation stipulated the below directives:
The Lending Cap: The amended act significantly reduced borrowing costs by limiting the maximum interest rate on loans.
The Deposit Floor: The few lucky Kenyans with money to deposit also benefitted. The amendments now guaranteed interest payment of 70% of the prevailing Central Bank Rate. At the time of enactment, the rate was approximately 6.3% per annum (i.e. 70% X 9%.)
This new legislation was a boon for Bank customers. However, the new cap also delivered some unintended outcomes, outlined further below.
A Brief History (Pre-2016):
Prior to July 2014, Kenyan banks provided loans based on individually-calculated Base Rates. Banks would then add additional percentage points (a Premium or Spread) to arrive at the overall loan interest rate. However, calculation of these Base Rates varied from bank to bank. Over time, there was increased public outcry relating to high overall borrowing costs. In response, stakeholders (the Kenya Bankers Association, CBK, etc) introduced a unified Base Rate (the Kenya Bankers Reference Rate or KBRR). The KBRR was to be used as the single base rate by all Kenyan banks. Going forward, the CBK published the more-transparent KBRR every 6 months. All banks then voluntarily priced loans based on KBRR plus a few additional percentage points (Spread).
Problem solved? Not, fully. Whereas the Base Rate was now standardized, the Spread was still quite variable. A lender could still choose to adjust their spreads and ensure that the overall borrowing cost did not actually change.
As mentioned in the introduction, a September 2016 amendment to the Banking Act, made the following changes:
- Lending Cap: The CBK established the Central Bank Rate (CBR) as the applicable Base Rate. The new lending regime also stipulated a maximum Spread of 4% for all Kenyan bank loans.
- Deposit Floor: Going forward, all deposits were subject to a minimum interest rate payout of 70% of the Central Bank Rate.
After this new legislation, the Central Bank began to calculate and publish the CBR periodically for commercial bank lending purposes. This, combined with the maximum spread, effectively capped the total interest rate any loan in Kenya. It also set the minimum deposit interest rates that could be offered by any bank in Kenya.
The push-back, 2018-2019:
The new legislation compressed Kenyan bank lending margins significantly. Some of the ultimate side effects were a reduction in new loans to individuals and Kenyan SMEs, and increased purchases of Government Securities. Many would also argue that the reduction in formal lending created opportunities for higher-cost Kenyan Digital Lenders.
The banks raised their concerns, which were echoed by the Central Bank’s own research. A draft CBK report, published in March 2018, outlined a number of adverse effects. Most notably, there was an overall reduction in lending to households and SME’s. Other negative effects included an increase in various banking fees.
In October 2018, Parliament passed an amendment that eliminated the Deposit Floor. This now meant that depositors were no longer guaranteed an interest rate of 70% of the Central Bank Rate for their deposits. Furthermore, in late 2018 a notable Parliamentarian proposed an amendment to further modify the overall lending rate.
The New Court Ruling:
On 14th March, 2019, the High Court declared sections of the 2016 amendment to the Banking Act unconstitutional. This ruling was in response to an October 2016 challenge to the referenced amendment, filed by Mr. Boniface Oduor. Without having had a chance to review the final written judgment, it would seem that the implied repeal has two key effects.
Firstly, the ruling itself suspends the repeal of the 2016 Banking Act amendment for 12 months. Secondly, the ruling leaves room for Parliament to enact new legislation. Such legislation could effectively eliminate the cap altogether. Alternatively the legislation may re-word the interest rates cap law to correct the constitutional failings outlined by the judges; namely vagueness, imprecision, ambiguity and indefiniteness.
Some likely ways forward:
- Appeal Version 1 – Borrowers. It is almost inevitable that one of our “legally-active” Kenyan Citizens will immediately appeal the above ruling (now happening). This may put the High Court ruling on ice in the interim.
- Appeal Version 2 – Lenders. Would anyone, including Banks, entertain the continued existence of legislation ruled to be unconstitutional? One can envision some other equally “legally-active” Kenyan / Kenyan entity lining up to get the 12-month delay lifted.
- New Legislation. In the meantime, Parliament has free reign to cure the issues raised in the 14th March 2019 ruling. Parliament may also choose to repeal the cap altogether. Finally they may introduce new legislation and a capping methodology as proposed in the late 2018 Parliamentary motion.
There are numerous upcoming activities in both the Chambers of Legislation and the Halls of Justice. However, as of now, there does not seem to be a need for borrowers to be overly-concerned.
Coming Soon: What can bank customers do to stay prepared regardless of the outcomes?