After three long years, Kenyan banks must have breathed a collective sigh of relief when the High Court ruled that a key part of the Interest rate cap law is unconstitutional, following a petition by a citizen. According to Justices Francis Tuiyot, Jacqueline Kamau and Rachel Ng’etich, the Act had failed to define the terms ‘credit facility’ and the ‘Central Bank Rate’ (CBR), thus their declaration of Section 33 (B) (1) and (2) of the Banking Act unconstitutional.
The judges stated that any words that have the potential of causing confusion must be clearly defined, and that the legislature should not assume that the meaning of material words can be inferred. “It must make it easy for everyone, including a layperson, to understand the meaning of a provision. In our view, Section 33(B) lacks the minimum degree of certainty that is required of legislation that creates criminal offenses.”
Happily for consumers, the Court granted a 12-month window from the date the decision was made (March 14, 2019) for a review the law to amend the offending sections, failure to which banks are free to determine the cost of loans rather than being subject to law.
Among those who welcomed the ruling is Moody’s Investors Service, who see the amnesty window as an opportunity for all players including the Central Bank, private sector representatives and commercial banks to push lawmakers to review the law “to benefit banks, consumers and the economy.”
According to Moody’s, a revision to the cap that no longer constrains lending institutions would be credit-positive for Kenyan banks because it would gradually lead to higher private sector credit growth, a boosting of business activity and overall economic growth.
Since the law came into effect, the growth of the private sector has experienced a decline, with annual growth in the sector decreasing from 17 percent in January 2016 to 4.4 percent in January 2017 – even as it is agree that there were other factors at play, such as the placing in receivership and subsequent closure of banks such as Imperial and Chase. Among others, the rate-capping law saw banks side-line many small borrowers, who suddenly became an unacceptable risk.
A revision to the cap that no longer constrains lending institutions would be credit-positive for Kenyan banks because it would gradually lead to higher private sector credit growth
With a decline in private sector growth, the economy also suffered a slowdown. Economic growth decreased from 5.8 percent in 2016 to 4.9 percent in 2017 – besides rate-capping, occasioned also by prolonged electioneering and the effects of the adverse weather. The sector had begun making positive strides, and a review of the law to open up lending once again would accelerate recovery.
Inevitably, some, like the Consumer Federation of Kenya (Cofek) has filed a notice of appeal to challenge the decision by the High Court. According to its secretary general, Stephen Muhoro, the decision by the judges irregularly transfers the powers of the legislation to the Central bank.
“The ruling cannot purport to transfer the legislative powers vested on Parliament, under Article 94, to the CBK. Our conviction is that the ruling has basis. It will form a bad precedent in the statutes… it must not be allowed to stay,” said Muhoro. Cofek also claims that if the law is to be repealed; it will affect many Kenyans who may not be able to afford the high-interest rates that Kenyan banks will – inevitably – begin charging.(