Will CBK deliver on promise of cheaper credit to SMEs?

In an interesting coincidence, the first Monetary Policy Committee meeting of Dr Patrick Njoroge’s second term at the helm of the Central Bank took place on Wednesday, July 24, 2019, just a day after Kiambu Member of Parliament Jude Njomo, had introduced the Banking (Amendment) Bill 2019 in the National Assembly for the first reading.

The Bill is a response to the March 2019 High Court ruling which pronounced Section 33(B) of the Banking Amendment Act (2016) as unconstitutional on account of being “vague, ambiguous, imprecise and indefinite”.

In an effort to stave off repeal of the law capping interest rates eight months ahead of the March 2020 deadline, the Bill puts in black and white issues deemed by the High Court bench to be grey areas in the present legislation.

It replaces the words “credit facility” with “loan” in Section 33(B), clarifies that the interest rate charged should not exceed four percentage points above the Central Bank Rate and states expressly that interest is to be computed on an annual basis.

If this is meant to spell relief for borrowers as is widely perceived, it only presents a hangover Dr Njoroge would rather not nurse as he starts his second term.

According to the Central Bank, the capping of interest rates has precipitated adverse outcomes in more ways than one, including stifling the conduct of monetary policy.

Even as growth in private sector credit remains anemic at 5.2 per cent, a trend that would ordinarily necessitate accommodative monetary policy, the Central Bank remains broadly cautious about adjustments to the base rate.

“Whilst we are still in this rate cap environment, there is still a serious danger for perverse reaction. You do not want to floor the accelerator going down a bend even if you are a good driver because you may end up crashing on the side”, Dr Njoroge said during the monetary policy briefing.

This abundance of caution, however, raises questions around the Central Bank’s ability to discharge two key elements of its mandate —forward guidance, which signals how it is likely to adjust its policy in the near term, and transmission of its policy adjustments into the economy.

The Central Bank of Kenya is on record, for example, stating that its fifty basis points rate slash in September 2016 triggered slower growth in lending, effectively misfiring as far as transmitting into the economy is concerned. It could help explain why, by and large, the Central Bank has stayed pat on the base rate, changing it in only three of the nineteen meetings held since the caps came into place. Even as inflation breached the target ceiling of 7.5 per cent between February 2017 and June 2017, the Central Bank did not engage a hawkish gear.

Legislator Jude Njomo, however, views the Central Bank’s position as dead on arrival.

“That argument about monetary policy is the same one the CBK brought to the courts and it was quashed. It is very sad the CBK has gone to bed with the very banks it is supposed to be regulating and they are now fighting this legislation together”, Njomo said when reached by the Business Daily.

“The interest rate cap has complicated monetary transmission”, said Standard Chartered Bank’s Africa Strategist, Eva Otieno. “In a normal credit environment, easing of monetary policy would stimulate growth of credit. However, in a rate cap environment, easing constricts credit growth as it lessens the number of borrowers able to access credit”, she says.

Despite a proposal in the Finance Bill (2019) to have the cap on lending rates done away with, Eva does not hold the view that repeal will see the light of day. Instead, she vouches for an environment more accommodative for alternative sources of credit if the economy is to countervail hamstrung monetary transmission even as Governor Njoroge embarks on his second term.