According to the new law, lenders who charge more than 14.5 percent on credit to customers face a one year jail-term or a fine of at least $10,000. The base lending rate in the East Africa’s largest economy is currently set at 10.5 percent by Central Bank of Kenya (CBK), the nation’s banking sector regulator.
Interest rates on credit by Kenyan banks had hit a high of 25.7 percent in December, last year.
President Kenyatta said that the move was necessary to cushion Kenyans who are disappointed and frustrated by the high cost of credit and while they are not getting good returns on deposits.
“I share these concerns. Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers,” Kenyatta said in a statement.
The president’s move to cap interest rates had been opposed by the National Treasury and banking stakeholders who said it would be counterproductive to the economy, Citizen TV reported.
As such, banks might be forced to turn away risky borrowers mainly in the Small Medium Enterprises, pushing them into the hands of micro-financial institutions commonly called SACCOs and shylocks who might charge more interest on loans due to demand.
Kenya Bankers Association (KBA), an umbrella body for bankers in the nation said that the move does not translate to obvious gains as there is little evidence to show that similar laws have led to economic improvements in other countries, adding that the government may be forced to reverse the law.
The move has been hailed by some analysts while others described it as populist and ignored market trends while focusing on endearing Kenyatta to the electorate ahead of the general election next year.
“Mr. Kenyatta was not willing to stick his head above the parapet on less than a year before the next presidential election,” Aly-Khan Satchu, Chief Executive Officer at Rich Management, told Financial Times.
Satchu added that the move will trigger a collateral damage within the market, leading to an increase in the Eurobond yield and credit rationing by financial institutions.
Marubu Munyaka, an economic analyst, however told Daily Nation that the law will scuttle cartels that have infiltrated the banking sector and will reduce the heavy burden of costly credit on Kenyans.
Kenyatta’s decision overruled Finance Cabinet Secretary Henry Rotich and CBK Governor, Patrick Njoroge who opposed the move saying it would distort the banking sector.
The law comes into effect nearly 16 years since the first efforts to reduce interest rates by former legislator, Joe Donde failed.
Kenya is the first East African nation to cap interest rates on credit.