According to the Central Bank of Kenya, the High Court of Kenya has ruled that the loan rate cap is unconstitutional. In a case filed by Boniface Oduor against the Attorney General and Central Bank of Kenya, Boniface challenged some procedural elements of the implementation of the rate cap law, arguing that it should have been discussed by the Senate.
The rate cap law will still be effective for a period of 12 months. In the ruling, the loan rate cap law was declared null and void but, to avoid disruption in the market, the court suspended the effect of the ruling for 12 months. This means loan yields over the next 12 months will still be subject to the limit of 400bps above the central bank rate.
The National Assembly remains the key decision maker. The court was not convinced that interest rate capping falls within the purview of monetary policy and was, therefore, solely a central bank issue. It noted that the National Assembly is still within its constitutional rights to set an interest rate ceiling. Following this ruling, the law must then go back to parliament to correct the procedural issues raised. Effectively, the National Assembly could still retain the law as is and simply correct the procedural issues. There have not yet been any change of sentiment from legislators regarding removing the loan rate cap law. We believe they would consider an amendment, but not an outright repeal.
Perfect timing for Kuria’s rate cap amendment proposal. In January, legislator Moses Kuria (member of parliament for Gatundu South) wrote a letter to the speaker of the National Assembly announcing his intention to table a bill to amend the rate cap. The bill has not yet been tabled in parliament, but this ruling gives Kuria the perfect opportunity to do so.
His proposal is as follows:
- Low-risk clients would continue to see a rate of a maximum of 400bps above the central bank rate. This would keep their loan yields at a maximum of 13%.
- A “negotiation window” of up to 600bps above the cap would be introduced for SMEs and unsecured individuals, implying loan yields of up to 19%.