Builders Warm Up to Looming Repeal of Rate Cap

The National Treasury is planning to review a law capping interest rates charged by banks in a move that is expected to unlock credit to the construction industry.

Treasury Secretary Henry Rotich has told the Financial Times of London that the government is preparing to review the capping of commercial bank lending rates that has negatively impacted on growth of lending to the private sector.

The move is part of major reforms demanded by the International Monetary Fund (IMF) to extend a suspended Sh153 billion emergency standby facility meant to preclude a balance of payment crisis, which expired on March 13.

President Uhuru Kenyatta in August 2016 assented to the Banking (Amendment) Act 2016, which capped commercial lending rate at four percentage points above the central bank’s benchmark rate and put a minimum deposit interest rate of 70 per cent of the benchmark that currently stands at 10 per cent.

The capping of lending rates came at a time when banks were charging interests of up to 20 per cent – a too-high level for a majority of businesses.

The well-intentioned initiative, however, came with its challenges. It forced commercial banks to stop lending to customers perceived as risky, a move that has now resulted in a worsening credit crunch in the private sector.

The Kenya Bankers Association (KBA) has indeed expressed concerns over the impact of the rate capping on the real estate and construction sectors.

The bankers’ lobby recently said that commercial banks have been hesitant to extend credit to individual customers, which has subsequently slashed the number of property transactions.

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At the same time, the rate capping has exerted pressure on the construction industry making it difficult for developers to complete new projects.

“The market demand attributes have continued to influence the supply side of the housing market. They point to the fact that several developed units remain unsold for a longer period,” chief executive Habil Olaka said during the release of a recent KBA’s Housing Price Index.

Bankers say the credit crunch will worsen under a new accounting standard that came into force on January 1, which compels them to shift their loss models from incurred to expected models.

This has been corroborated by investment firm Cytonn which has already called for an urgent review of the law, arguing that lack of access to credit has seriously undermined housing development in the country – leading to a huge number of incomplete and delayed projects.

The firm reckons that the rate cap law review will encourage many financial institutions to venture into construction and mortgage financing, unlike the current situation where most lenders are limiting credit to businesses in favour of buying risk-free government securities.

“Most of the banks [55 per cent] interviewed in the [Total Cost of Credit Post Rate Cap] survey indicated that interest rate capping negatively affected their lending as it compelled them to tighten their credit standards,” Cytonn said.

The Treasury, which has over the past months dismissed banks’ declarations that the rate cap is to blame for the credit crunch to the private sector, will have to marshal the support of members of the National Assembly to review the law.

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