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Kenyan bank stocks rise on news of possible interest rate cap repeal

By Morris Kiruga, in Nairobi
Posted on Monday, 4 November 2019 08:02

President Kenyatta - right - has been a longtime opponent of the interest rate cap

Kenya’s parliament may repeal the interest rate cap as early as this week, after a parliamentary committee agreed with President Kenyatta’s refusal to assent to a finance bill.

President Uhuru Kenyatta made his most direct assault against the interest rate cap in an exhaustive memo to Parliament on October 16th.

In the memo, he cited multiple reasons why he had refused to assent to the finance bill. 

  • He specifically singled out the reduction of credit to the private sector, decline in economic growth, mushrooming of shylocks and other reasons.
  • He also cited the ways the rate cap had affected lenders’ business models, as well as an increase in average loan size, which disproportionately affected small firms and individuals.

While the legislature has previously refused the executive’s efforts to repeal the law, this most recent move means that it would need a two-thirds majority vote to still force the cap through.

Such a vote would require bipartisan support, and the cap’s most ardent supporters may find themselves without the necessary numbers on both sides of the aisle to vote to keep it.

  • Kenyatta’s move follows a court ruling earlier this year that found the cap unconstitutional but gave parliament 12 months to repeal it.
  • Parliament still voted to keep the cap in September, dashing the executive’s hopes that it would do so without some coercion.

The House gave its most visible indication so far that it would agree with the President this time after its crucial finance committee agreed with the memo.

Perhaps to move towards a compromise, the committee added a proposal that will mean that the repeal cannot act retroactively.

  • “…any agreement or arrangement to borrow or lend which was made or entered into pursuant of the repealed section, shall continue to be in force on such terms including interest rates, and for the duration specified in the agreement or arrangement,” the committee said in a report to the full House.

The stocks of eight of Kenya’s 10 listed banks have rallied to the news of the probable repeal, gaining up to Shs. 50 billion in the week since the President’s memo became public.

  • Among the biggest gainers was the newly merged NCBA bank, which is partly owned by the Kenyatta family.

Kenyatta’s government hopes that removing the interest rate cap will reinvigorate the economy by encouraging lenders to give to the private sector.

Despite sustained economic growth, the private sector has been struggling, with many companies laying off workers in a bid to stay afloat.

The revenue authority has routinely missed collection targets, with income taxes recording the highest shortfall in its 2018/2019 collections.

Kenya’s new Cabinet Secretary for Treasury, Ukur Yattani, has been candid about the state of the economy, including admitting that revenue collections have not been properly set.

  • “To avoid going back, making budget based on false assumptions, this time we have decided to be realistic. We know our deficit last year, we know our deficit for many financial years,” he recently told a parliamentary committee.
  • Yattani also recently told a Senate Committee that not raising the debt ceiling to Shs. 9 trillion would create “a crisis in the country.”

Kenya’s GDP will grow by 6.0 percent in 2020, according to a report by the World Bank released on October 30th.

  • “The growth outlook is predicated on normal weather conditions, authorities’ staying the course in planned fiscal consolidation, and limited spillover effects from the anticipated global slowdown,” the Bank said in its most recent economic update.

Bottom Line: Kenya will need both it financial sector and tax authorities to be in full health to support growth and the inevitable bill for heavy infrastructure spending.

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