Interest Controls

: Stakeholders engage on the effects of interest rate controls in 2018.

In August 2016, Kenya’s President Uhuru Kenyatta assented to the Banking (Amendment) Bill 2015, which had been brought forward by Kiambu Member of Parliament, Hon. Jude Njomo, as a private member’s bill. The development set the stage for the enforcement of the Banking (Amendment) Act 2016 which set the maximum interest rate at a maximum of 4 percent above the Central Bank’s Base Rate (CBR) for any credit facility in Kenya; with a ceiling of 70 percent on deposits in interest-earning accounts to 70 percent of the base rate.

The legislation was passed amid concerns that it could potentially pave the way to economic challenges such as constrained access to credit for Small and Medium-sized Enterprises and the potential emergence of unregulated informal and exploitative lending entities. In the build-up to the enaction of the Bill, the Kenya Bankers Association, the Central Bank of Kenya, and other institutions such as the International Monetary Fund had all raised concerns over the potential negative effects of capping interest rates, citing the challenge the controls would create on risk-based pricing.

But the clamor for interest rate capping was not new. Earlier, another Member of Parliament, Hon. Joe Donde had pushed a similar bill raising concerns over the high interest rates in the mid-1990s ranging between 25-35 percent. Later, the Government attempted to cap lending rates when then-Finance Minister David Mwiraria introduced the in-duplum rule in 2004.

On account of the economic challenges imposed by the legislation, President Uhuru Kenyatta in 2019 recommended its repeal. Declining to assent to the Finance Bill 2019, President Kenyatta referred the bill back to Parliament with a memorandum outlining the reasons for his refusal to assent to it. The legislature was set to considered and vote on the President’s recommendations on 5th November 2019 but failed to raise a two thirds majority that would have seen the Finance bill sail with the interest capping. President Kenyatta signed the bill on 8th November 2019, bringing an end to interest rate controls.

Subsequent to the repeal of interest rate capping, the banking industry continued to develop innovative solutions to enhance credit access for MSMEs. These initiatives include capacity building initiatives designed to de-risk the businesses and make them bankable. In 2018, the Kenya Bankers Association launched the Inuka Enterprise capacity building program. Supported by the banking industry, the initiative had at the close of the year 2020 reached more than 10,000 SMEs.