Kenya Law Gets Punitive on Borrowers who Accept High Interest Loans

Old Ksh 1000 demonetized

Despite banks withholding credit to the private sector, the Central Bank of Kenya (CBK) has retained its benchmark lending rate at 9.0 percent for the seventh time in a row. According to the Monetary Policy Committee, this interest cap has been maintained in an environment where inflation expectations were within the target range and the economy was operating close to its potential.

Bankers have decried the move saying the interest cap limits commercial lending rates set at 13 percent which is four percentage points above the benchmark forcing them to cut back on loans to high-risk groups. All too often these commercial institutions get punished for breaching the interest cap set by CBK, but a new proposed bill seeks to bring justice to all parties involved.

“As it stands, the penal provision under subsection (3) is couched in discriminatory terms as it applies only to banks and financial institutions yet the legal obligation is aimed at both the bank/financial institution and the borrower/customer… amendment) is therefore necessary as it seeks to create a penal provision that is not discriminatory,” read a memo attached to the Bill sponsored by Jude Njomo, the legislator who introduced the cap law.

Borrowers will be fined up to Sh1 million or jailed for a maximum term of one year if found to have accepted loans above the 9% interest cap if Parliament adopts a bill that seeks to entrench legal limits on lending rates.

CBK said that the Private-sector credit expanded by 5.2 percent in the year to April, well below the ideal growth rate of 12 percent to 15 percent. Last year, an attempt to remove the interest cap, so banks could keep off lending to customers they considered too risky was rejected by the lawmakers. The new bill published July 5 was an attempt to reinforce the rate cap and make it constitutional in line with a High Court order.

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