Equity Group Kenya Sees Limiting of State Lending `Archaic’

NAIROBI (Capital Markets in Africa) – Kenya’s biggest bank by market value said plans by lawmakers to restrict how much the government can borrow from commercial lenders are outdated and risk infringing on the independence of the central bank.

Legislators in the East African nation have proposed the measure to avoid the state sector crowding out businesses and consumers from accessing credit. Lawmakers also want to compel banks to set aside 10 percent of their loan portfolios for small- and medium-sized companies, while rejecting the Treasury’s efforts to repeal laws capping commercial interest rates.

“I don’t believe legislating processes is the way to go — it’s old and archaic,” Equity Group Holdings Ltd. Chief Executive Officer James Mwangi said in the capital, Nairobi on Monday. “You can’t delegate responsibility to the Treasury and central bank, give them independence and autonomy, and then cripple their capability by legislating against their jobs. It has never worked anywhere.”

Kenya is under pressure to repeal the rate-capping law it introduced in 2016 as one of the International Monetary Fund’s conditions for renewing a standby-credit facility by Sept. 15. Lenders have complained that the caps, set at 400 basis points above the central bank’s benchmark rate, make it difficult for them to price for risk.

“We signed those commitments with our eyes open,” he said. “It would be naive for us to think we can just walk away from commitments. Commitments have consequences.”

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Equity has seen the number of borrowers decline by 42 percent to 700,000 since the introduction of rate caps, Mwangi said. Its holdings of government bonds increased by 37 percent in the first half of this year.

The market has adjusted over the two years the cap has existed toward shorter tenors, according to Jared Osoro, director for research on financial markets and policy at the Kenya Bankers Association lobby group. A decision by lawmakers to remove another limit on deposits had little effect on the overall credit market, he said.

“This, to my mind, doesn’t pass even the smell test for substantial modification,” Osoro said. “The monetary policy still remains a victim of this bad policy.”

Kenya’s government imposed the cap in August 2016 to fulfill an election-campaign pledge by President Uhuru Kenyatta to improve lending terms for consumers, against the advice of the central bank. Governor Patrick Njoroge has complained the cap complicates monetary policy by making credit demand hard to predict.

Retaining the rate capping law “was like throwing Kenyans under the bus,” Mwangi said.

Source: Bloomberg Business News