Why residents of Kawangware welcome the interest rate cap
“Kila mtu ataweza kukopa sasa” (everyone will now be able to borrow) exclaimed Eunice, a grocer from Kawangware, a neighbourhood of mostly low income households and small businesses west of Nairobi.
Last Friday, FSD Kenya hit the streets for the first “Field Friday”, when we get out of the office to hear people’s views on the Kenyan financial sector and then relay those views to you.
Eunice’s view mirrors that of many others in similar circumstances. She was commenting on the Banking (Amendment) Act, 2016 that was recently assented to by the President. The law caps lending rates at not more than 4% the base rate set by CBK when pricing their loans, and not less than 70% of the set base rate paid on deposits as interest.
This optimism is echoed by Ronald, the General Manager of a popular restaurant in Kawangware, who was happy that the law now stipulates the minimum interest payable for deposits. “My bank doesn’t pay any interest for any savings below KShs. 50,000. They instead charge monthly fees that erode my savings,” Ronald said. He had been saving with his bank in order to use the savings as collateral for a loan to start a business with a friend. “I once approached my bank for an unsecured facility but I did not qualify as I am paid in cash and I tend only to bank my savings after deducting all monthly expenses,” he added.
The banks’ position is that capping interest rates would hurt small businesses and marginalised individuals deemed risky to lend to, which would have a negative impact on the overall economy.
Joseph, who owns and operates a timber yard, seems to agree. “Currently, banks can lend without demanding collateral by simply assessing your business and account turnovers to approve your loan. I am not sure they will be able to do so with this regulation. Banks will be very selective on whom to lend to since they cannot afford to accumulate many bad debts. They will probably require title deeds or logbooks to secure any facility they extend,” Joseph said. “However, they will have no problem offering asset financing because the asset is theirs until the loan is cleared,” Joseph added, thinking deeply.
The relative scarcity of formal loans can be explained by the plight of Mama Wanja, a second-hand clothes retailer, who could never imagine taking a loan from a formal financial institution. “I have seen many of my fellow businessmen suffer as a result of bank loans, so why should I take one? Loans from banks are a preserve of the rich who own assets that they could offer as collateral. In my case, my children are my only assets and no bank could ever consider them to be collateral,” she said. Her sentiments are echoed by Jacinta, who started her timber yard businesses using her pension savings. “I only survive by what I have, the sales I make will determine the amount of stock I purchase. When I don’t sell, then I am not worried of how to pay debts. I am not keen to borrow from banks so I don’t see any direct impact of the interest rate caps,” Jacinta boldly declared. Their views point to a risk averse segment informed by challenges such as lack of collateral, fear of foreclosure in event of default, and irregular incomes, amongst others.
As our FSD Kenya team wrapped up our inaugural ‘Field Friday’ exercise we couldn’t help but reflect on our interactions with the various households and enterprises of Kawangware, all of whom are part of the vibrant and growing Kenyan economy. Our observation was that, in one way or another, many people felt frustrated by the financial markets in Kenya and welcomed changes in the system. We definitely need to keep the conversation going if we are to foster a vibrant and inclusive market.