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Kenya

Kenya loan rate cap declared unconstitutional

  • According to the Central Bank of Kenya, the High Court of Kenya has ruled that the loan rate cap is unconstitutional.

  • The rate cap law will still be effective for a period of 12 months.

  • The National Assembly remains the key decision maker.

Kenya loan rate cap declared unconstitutional
Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Rahul Shah
Rahul Shah

Head of Financials Equity Research

Tellimer Research
14 March 2019
Published by

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 has 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:

1. 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 13%.

2. 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%.

Equity Group set to be the biggest gainer in the event of amendment. In our recently published report, 'Kenya banks: Asset quality, the defining puzzle piece' we ran a scenario analysis on Kuria's proposal and determined that the sector would record an average 590bps rise in ROE should the amendment be passed as it is. Due to its large SME loan book, Equity Group would record the highest uplift in ROE, of 690bps, while DTB would record the lowest, with a mere 350bps rise in ROE.

KCB is our top pick in the sector at a target price of KES54.00 (ETR of 30%). This is based on: 1) KCB Group’s large retail and corporate market share, boosted by the government’s shareholding in the bank; 2) the increasing contribution of non-interest revenue from alternative channels; 3) its sector-leading net interest margin; and 4) its continued high efficiency, delivering a lower cost/income ratio.