May 24, 2018 / 7:00 AM / a month ago

UPDATE 3-Kenya's Treasury avoids dealing with rate cap in draft law

By Duncan Miriri

NAIROBI, May 24 (Reuters) - A promised move to repeal Kenya’s cap on commercial lending rates does not appear in a draft bill on financial markets that was published late on Wednesday.

The government capped the rates in September 2016 at 4 percentage points above the central bank’s benchmark interest rate, which now stands at 9.5 percent.

The cap was an attempt to limit the cost of borrowing for businesses and individuals, but the International Monetary Fund blames it for sluggish growth in private-sector credit.

Finance Minister Henry Rotich had said the cap would be repealed in a financial-markets conduct bill, which will be presented to parliament next month. But it doesn’t appear in a draft published for public comment.

Rotich did not immediately answer calls requesting comment. A finance ministry source told Reuters the government had realised repealing the cap would be difficult because of opposition from the lawmakers who proposed it.

In a sign of the heated debate over the issue, a senior Treasury official told reporters on Thursday that the cap should be modified.

“We can’t live with a cap that is inhibiting implementation of monetary policy,” said Geoffrey Mwau, director general of budget, fiscal and economic affairs at the ministry of finance. “We are going to come with a proposal on that ... a more flexible option.”

The government planned to start a fund to underwrite a portion of loans lent out by commercial banks to small and medium enterprises, which have borne the brunt of the reduction in credit following the rate cap, Mwau said.

He said the fund, whose potential size he did not give, would help encourage banks to lend to the small and medium-size companies, which are considered key for economic growth and job creation.

The IMF has said the cap must be repealed for Kenya to keep access to the Fund’s balance of payments support. Banks have also been lobbying for the cap to be repealed.

Bank executives say they felt the small and medium-size companies were too risky to lend to and they could not price the risk properly with the cap.

Last month, President Uhuru Kenyatta said the government was considering modifying or scrapping the law because it caused credit to dry up.

On Thursday, however, lawmakers lauded the finance ministry for not trying to interfere with the cap in the draft bill, which would establish new bodies - including a Financial Markets Conduct Authority and a Financial Sector Ombudsman - to promote and maintain “a fair and efficient financial sector in Kenya”.

“They have read the mood of the country and they know if they try to change that they will be rubbing people the wrong way. They have done the right thing,” said Jude Njomo, the legislator who initiated the capping law.

One analyst said the ministry might have left the repeal out of the draft bill because they are aware it is an emotive issue that could provoke public anger but will introduce it later in the legislative process.

Additional reporting by George Obulutsa, Editing by Maggie Fick and Larry King

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