Consumer Federation of Kenya (Cofek) filed papers in court to opposed the suit seeking to declare the law that capped commercial lending loan rates as unconstitutional, arguing that factors that were behind costly loans are yet to be addressed.
The Kenyan government introduced interest rate controls in September 2016 through an Act of Parliament that limits lending rates to not more than four percentage points above the Central Bank Rate (CBR).
“The reasons, which necessitated the capping regime have not been mitigated upon and removing the rate controls without addressing the initial challenge of high cost of credit before the rate cap regime came into place would in fact lead the country back to the era of high rates whose consumer outcry prompted the controls in the first place,” says cofek.
According to the Kenyan government, lenders had failed to pass on the benefits of growth in the industry to the wider economy by lowering their rates, and instead profited themselves on the growth in the industry, hence the government’s introduction to the loan rate cap.
The current CBR rate is 9% meaning banks are now required to charge borrowers a maximum of 13% interest on loans.
Previous to the rate caps, interest rate on some bank loans stood at more than 20% as lenders competed for maximum profit, with individuals and unstable companies taking up the most expensive loans.
The suit challenging the interest cap was filed by Mr Boniface Oduor arguing that the law fails to prescribe penalties for non-compliance, terming it ambiguous. He also claimed that the Act is discriminatory to banks and financial institutions.
Mr Oduor added that the National Assembly had no power to direct or control the CBK in formulating or implementing monetary policy. Cofek says the proposal was subjected to public participation where all Kenyans and institutions were afforded a chance to submit on the proposal.
The International Monetary Fund has demanded the cap be cancelled as a condition for Kenya to access its balance of payments support.