The debate over whether interest rates should be regulated has persisted for over two decades, dividing policymakers, economists, and the public alike. Proponents argue that regulation is necessary to protect consumers from the unchecked and exploitative practices of lending institutions, thereby fostering financial inclusion and fairness. In contrast, lending institutions counter that any regulation of interest rates distorts the cost of credit, stifles a free market economy, and restricts access to loans for the very people such rules aim to protect.
This debate took center stage in 2016 when Kiambu Town Member of Parliament, Jude Njomo, introduced a private member’s bill in Parliament. This legislative move resulted in the insertion of Section 33B into the Banking Act, which imposed a cap on lending interest rates at four percentage points above the Central Bank of Kenya’s base rate. It also set a floor on deposit rates at 70% of the base rate, with stringent penalties for non-compliance, targeting CEOs of financial institutions who breached these regulations.
It can be contended that this amendment was largely politically driven, coming as it did during an electioneering period. The regulatory approach seemed to favor short-term political gains over a balanced financial strategy. Once the electoral dust had settled, the government, through the Finance Act, 2018, repealed the floor on deposit rates. The stated reason was to enhance access to credit and mitigate the negative impact of interest rate caps on credit growth and financial stability.
The debate reached a climax in 2019 when a private citizen took the issue to court, challenging the constitutionality of the interest rate caps. On March 14th, 2019, the High Court in Nairobi declared Section 33B unconstitutional. However, recognizing the potential disruption to the financial sector, the court suspended the declaration for 12 months to allow Parliament time to review the legislation. It was a rare instance of judicial prudence, balancing the immediate need for regulatory correction with the potential chaos that could ensue in the financial markets. Parliament ultimately repealed Section 33B through the Finance Bill, 2019, preempting the court’s suspension period from lapsing.
Yet, despite the repeal, the discourse surrounding the regulation of interest rates is far from settled. The underlying issues, namely, consumer protection, financial inclusivity, and the role of regulation in a free-market economy, remain pertinent. As long as borrowers perceive interest rates as exorbitant and lenders see regulation as an infringement on market dynamics, the debate will continue to simmer, shaping Kenya’s financial landscape for the foreseeable future.
It remains to be seen whether future legislative or judicial interventions will strike a balance between consumer protection and market freedom. We will continue to monitor these developments closely.
If you need any assistance or advice relating to interest rates, loan structuring, or any related matters, please feel free to reach out to us at peter@pmlaw.co.ke.
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