A law capping interest rates in Kenya has stoked fears of copycat legislation in East Africa and a reversal of common integration policies ahead of the launch of a regional monetary union.
By virtue of Kenya being the most developed economy in the East Africa Community, its apparent abandonment of the free market ideals at the heart of the monetary union convergence criteria has left regulators and investors uncertain of the direction of the protocol.
National Bank of Rwanda Governor John Rwangombwa said money managers across the region were waiting to see the impact the caps would have on access to credit but maintained that controls were not always good in managing financial issues.
“National laws are supposed to address national issues. Kenya’s financial sector is the most developed in the region and second to South Africa on the continent. It is a good testing field,” said Mr Rwangombwa.
Under the East African Community Monetary Union Protocol, the member states committed themselves to pursue a free market economy with a floating exchange rate.
“The policy decision could create some disharmony or friction within the region’s banking sector and eventually affect the monetary union integration process,” said Charles Katongole, senior executive at Standard Chartered Bank Uganda.
Joram Ongura, an equities trader at SBG Securities Uganda, said monetary union policy targets could now come under review because they were originally anchored in market determined fundamentals.
The immediate impact in Kenya of President Uhuru Kenyatta signing the Central Bank (Amendment) Bill 2015 into law on Wednesday was a rout on banking stocks listed on the Nairobi Securities Exchange, which shed $840 million in market value by Thursday.
Banking stocks at the Dar es Salaam Stock Exchange, Uganda Securities Exchange and Rwanda Stock Exchange were stable. Even Kenyan bank counters cross-listed in the three bourses were unmoved because they rarely trade.
In Kenya, some banks halted the issuance of new personal unsecured loans, motor loans and emergency cash loans, citing the uncertainty around the implementation of the new law. Co-op Bank bucked the trend, saying it would be lending at the new rates immediately.
“We advise that pending receipt of full guidelines from the Central Bank of Kenya, particularly on the applicable base rate, all new credit facilities shall be at a rate not exceeding 14.5 per cent. Do refresh the relevant facility offer letters in liaison with our credit management division,” Co-op Bank chief executive officer Gideon Muriuki instructed branch managers in a circular Friday.
The law pegs interest rate margins to a base rate commonly understood to be the Central Bank Rate, which is currently at 10.5 per cent (there are contentions it could be the KBRR, which is reviewed every six months) but is revised bimonthly.
It requires lending rates not to exceed four percentage points above the base rate, meaning the maximum interest rate a borrower should pay for a loan is 14.5 per cent.
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