Consumer Federation of Kenya in court fight against loan rate cap repeal bid

By Galgallo Fayo | Business Daily, Kenya August 8, 2018

A consumer lobby has opposed repealing a cap on commercial lending rates, arguing that factors that were behind costly loans are yet to be addressed.

Consumer Federation of Kenya (Cofek) in papers filed in court yesterday opposed the suit seeking to declare the law that capped the rates unconstitutional.

Kenya 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.

The government introduced the cap because it said lenders had failed to pass on the benefits of growth in the industry to the broader economy by lowering their rates, and instead raked in profits.

The current CBR rate is nine per cent meaning banks are now required to charge borrowers a maximum of 13 per cent interest on loans.

Prior to the rate caps, interest rate on some bank loans stood at more than 20 per cent as the lenders competed for maximum profit, with individuals and shaky companies taking the most expensive debt.

The suit challenging the interest cap was filed by Mr Boniface Oduor who claimed that the Act is discriminatory to banks and financial institutions.

Mr Oduor had argued that the law fails to prescribe penalties for non-compliance, terming it ambiguous.

He added that the National Assembly had no power to direct or control the CBK in formulating or implementing monetary policy.

But Cofek says the proposal was subjected to public participation where all Kenyans and institutions were afforded chance to submit on the proposal.

The International Monetary Fund has demanded the cap be repealed as a condition for Kenya to access its balance of payments support.

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