The High Court of Kenya declared on Thursday that a capped interest rate on commercial banks is unlawful but the rate cap will not be lifted immediately.
The ruling said the section of the banking act imposing the cap was unconstitutional because it only punished bankers and not customers for contravening the law.
Despite the decree by the High Court, the judges suspended the ruling for 12 months to allow parliament to re-examine the law and the Central Bank to work out the necessary mechanisms to put in place.
“The 3-Judge High Court Bench ruled that capping of interest rates under Banking Act Sec 32B is unconstitutional. However, implementation is suspended for 12 months to allow the regulator to put in place appropriate mechanisms,” Central Bank Of Kenya tweeted.
The law capped interest rates at 4 percentage points above the central bank’s benchmark in 2016, saying they were concerned about high levels. After the law was effected, Small and Medium Enterprises (SMEs) have been complaining of reduced lending by commercial banks which has affected economic growth plans for the country.
Capping of the interest rate contributed to a private credit squeeze, as commercial banks asserted that it forced them to cut back on loans to high-risk borrowers.
Tough economic conditions forced the hand of some lawmakers to call for the revision of the law.
“Although the responsibility of the Central Bank of Kenya in setting and publishing the Central Bank Rate under Section 36 of the Central Bank Act is undoubtedly a function of formulating monetary policy, the petitioner (Mr Boniface Oduor) has not demonstrated to the satisfaction of the court that the provisions of Section 33B, relating to interest rate capping, falls within the purview of monetary policy,” said the court ina press summary.
Last year, the National Treasury CS Henry Rotich proposed the amendment of the Banking Act to enhance access to credit and minimise the adverse impact of the interest rate caps on credit growth which strengthens financial access and monetary policy efficacy..