Parliament has received a notice to cap interest rates for micro lenders in a law review aimed at curbing predatory lending practices.
The National Assembly speaker last Thursday received the notice from Kesses MP Swarup Mishra seeking legal drafters to craft a Bill that will demand that the Central Bank of Kenya caps lending rates by micro-financiers.
Microfinance banks are excluded from a government cap on commercial bank lending rates of four points above the central bank’s benchmark interest rate, which now stands at nine per cent.
Micro-financiers have been aggressive to extend credit to the banked and unbanked alike, saddling borrowers with high interest rates of 18 per cent to 200 per cent and leaving regulators scrambling to keep up.
Now, there is pressure to bring them under the CBK rules and have them charge fair interest rates.
“I wish to introduce a Bill that seeks to cap interest rates that are charged by micro finance or other money lending set-up, which shall see the central bank control all formal and informal short term money lenders,” said Dr Mishra in the notice.
Investment in bonds and bills
Commercial banks responded to the rate caps by increasing their investment in government bonds and T-bills, resulting in a slowdown in the growth of lending to the private sector.
The banks argued they could not accommodate riskier borrowers within the set maximum interest rates, currently standing at 13 per cent.
The freeze in commercial bank lending to individuals and small businesses coupled with demand for quick loans have boosted the unregulated microlenders.
Seasoned players in this market include Letshengo, Tala, Izwe and Branch, while new market entrants include digital lending platforms such as Nairobi Securities Exchange-listed firm Car & General and MyCredit.
“There is direct need to rope in the errant micro finance institutions to safe-guard our citizens from being exploited financially especially in this era of liberalisation where we are encouraging foreign investment,” said Dr Misra.
About 2.7 million people out of a population of around 45 million have been listed on Kenya’s Credit Reference Bureaux, according to a study by Microsave, a consultancy which advises lenders on sustainable financial services.