EDITORIAL: Put conditions for reversing rate cap

The rejection of the capping of interest rates by President Uhuru Kenyatta should provide an opportunity for lawmakers to review whether indeed they should retain it as it stands.

The central argument on why the rates are in place revolves around failure by banks to set reasonable interest rates and disclosing all loan conditions. One of the questions that MPs should ask is the extent to which commercial banks have changed the way they treat borrowers in this regard.

Is there reason to believe that the whimsical increase of lending rates by banks would come to an end? Sometimes some banks would increase the rates by a much higher proportion than the upward change of the Central Bank Rate (CBR), especially when you take into account hidden charges that were not factored in the lending rate.

MPs can ensure that this is answered to their satisfaction before they consider changing their stance and accepting the president’s suggestion.

There has been the long-standing issue of annual percentage rate (APR) that shows the actual cost of loans when the interest rates as well as other costs of a loan are put together and expressed in percentage terms for the whole year.

While some banks may have gone ahead and fully disclosed this APR, it is not yet clear that all commercial lenders have indeed done this.

It would be foolhardy if the rate cap was removed and full information on loans was not available before a client signs on the dotted line.

Banks have themselves made a good argument that the rate cap has made it difficult to price the risk of each client with the caps in place. It is clear that this has in turn forced them to do the only thing they can: move their money into government securities and restrict lending to highly profitable and liquid companies and individuals. That is to say that micro, small and medium enterprises (MSMEs) have been shut out in a big way. There is good reason to look at this argument and consider compromises.

The MPs can insist on the changes that banks can make to the way they conduct business and treat customers and then this can form the basis on which a review of the rate cap can be done. In short, MPs should put some conditions for banks to meet before they remove the existing restrictions on the lending rate.