• In September 2016, the Kenyan Parliament passed an amendment to the Banking Act that capped interest rates at 4% of the Central Bank of Kenya Base Rate.
  • Three years down the line, the SMEs miracle has failed to materialize. How could such a noble cause prove so disastrous?
  • With Uhuru’s stroke of a pen to reject signing the finance bill until the capping of interest rates is dropped he has perhaps revealed his true position on the controversial matter.

After 3 years of interest rate caps, Kenyan Banks are once again at liberty to set interest rates to their liking after President Uhuru Kenyatta helped removed the yoke from their necks.

In September 2016, the Kenyan Parliament passed an amendment to the Banking Act that capped interest rates at 4% of the Central Bank of Kenya Base Rate.

Following the Parliament’s vote, President Kenyatta assented the bill into law, ushering Kenya into the era of ‘controlled’ lending.

President Uhuru Kenyatta signing a bill in the past
President Uhuru Kenyatta signing a bill in the past

On the face of it, the move was meant to benefit the ordinary Kenyans who couldn’t afford the steep lending rates local banks were charging.

Many MPs who spoke in support of the Bill waxed lyrical on the challenges that borrowers from the Small and Medium Enterprises (SMEs) were undergoing when approaching the “greedy” banks.

'Capping of interest rates will stop this ‘nonsense’ dead in the tracks and before our very eyes SMEs will thrive like never before' was the general mood of the 11th house as they chorused in unison and passed the bill championed by Kiambu MP Jude Njomo.

Kenyan parliament in session (Twitter)
Kenyan parliament in session (Twitter)

Three years down the line, the SMEs miracle has failed to materialize and according to entrepreneurs, the bill has made things worse.

How could such a noble cause prove so disastrous? Where did the rain start beating Kenyans?

The Turnaround

Nairobi City skyline.
Nairobi City skyline.

As early as 2017, grumbling against the law started to emerge with local Kenyans decrying that local banks weren’t as generous and welcoming in lending to them, in fact they had slammed the door in their very faces.

‘Cornered’ local banks decided to give ordinary Kenyans a wide berth and shifted their focus to lending to the more ‘trustworthy and reliable’ government, leaving Kenyans at the mercy of crooked and menacing shylocks.

Central Bank of Kenya Governor Dr. Patrick Njoroge soon joined calls for scrapping of the capping law saying preliminary findings of a joint study with the Treasury on the impact of the rates capping on growth of credit had confirmed a negative impact.

“I think it is clear to us that this (rate cap) has been problematic in many ways. What I cannot tell you is the path going forward (and) how this will happen,” Dr. Njoroge said.

CBK Governor patrick Njoroge during a past press briefing (Twitter)
CBK Governor patrick Njoroge during a past press briefing (Twitter)

As he spoke, global financial institutions like World Bank and IMF added their voice on the weighty issue and said it was time for it to go.

Save for a few critics who included; Institute of Public Accounts of Kenya, Kenya Private Sector Alliance and the Law Society of Kenya, who called for more time for the bill to have its positive impact before it is done away with, some even went as far as calling for local banks to be forced to lend to small businesses. There was a general feeling the bill might not be the silver bullet many had anticipated. 

President Uhuru Kenyatta talks to former Safaricom CEO the late Bob Collymore (left), KCB Group CEO Joshua Oigara (centre), Equity Bank CEO James Mwangi
President Uhuru Kenyatta talks to former Safaricom CEO the late Bob Collymore (left), KCB Group CEO Joshua Oigara (centre), Equity Bank CEO James Mwangi

In March 2019, Kenyan Judiciary set the stage for the ultimate collapse of the bill after a three-Judge Court Bench ruled that the capping of interest rates under Banking Act section 32B is unconstitutional.

By the looks of things the die was cast for the capping of interest rates.

Uhuru Kenyatta nails the final nail on the Interest rate caps coffin

President Uhuru Kenyatta arrives at Safari Park Hotel for the official launch of Stawi digital credit facility for SME's and the inaugural Inua Biashara Day.
President Uhuru Kenyatta arrives at Safari Park Hotel for the official launch of Stawi digital credit facility for SME's and the inaugural Inua Biashara Day.

Last month, President Kenyatta threw his weight behind the banking industry and summarily ‘ordered’ lawmakers to read from the same script.

President Kenyatta declined to approve the Finance Bill and instead asked Members of Parliaments to scrap commercial lending rate caps before he would agree to sign the bill.

On November 5th 2019, Parliament met but lacked the numbers to veto the president’s reservations.

Kenyan Parliament Building
Kenyan Parliament Building

At least 233 MPs were required to vote to defeat the reservations but only 161 members were present, effectively paving the way for commercial banks to now be at liberty to charge the rates as they please following the repeal of Section 33 (b) which set the caps

Uhuru, in his refusal to assent to the Finance Bill, said the interest rate caps stifled borrowing by SMEs arguing the entities were crowded by government's appetite for borrowing from commercial banks.

Commercial Bank of Africa
Commercial Bank of Africa

Mr. Kenyatta himself has interests in the banking industry with his family owning the vast Commercial Bank of Africa which recently merged with NIC Group to become the country's third-largest bank by assets base worth Sh444 billion.

With uhuru’s stroke of a pen to reject signing the finance bill until the capping of interest rates is dropped he has perhaps revealed his true position on the matter, he was never into controlling banks lending rates to begin with but rather for ‘political reasons’ which fit him at the time he assented the bill, for now, Bank lending rates can move in a free market.

On Wednesday, President Kenyatta launched Stawi App, a digital credit facility for small and medium enterprises (SMEs) at the inaugural Inua Biashara Day in Nairobi.

Speaking during the launch, Mr. Kenyatta said the App will offer a longer repayment period to SMEs compared to other lenders.

"Stawi will offer a longer repayment period to small business holders and therefore, grow their businesses to the next level," said Uhuru.

The new product will be managed by NCBA (NIC group & Commercial Bank of Africa), Co-operative Bank, Diamond Trust Bank (DTB), and Kenya Commercial Bank. By the looks of things, business is back to normal and local banks are moving in for a kill.