Banks should retain interest on old loans
By Editorial.Team, June 29, 2023The law does not apply retroactively; it only becomes applicable on the effective date going forward. Bearing this in mind, it is not clear why commercial banks increase interest rates on existing loans every time the Central Bank’s Monetary Policy Committee (MPC) revises the Central Bank Rate (CBR).
On Monday, CBK Governor Kamau Thugge presided over his first MPC meeting, during which the base lending rate was increased from 9.5 to 10.5 per cent in a move aimed at checking inflation.
This was fine considering that the cost of living is one of the major sticking points in the political economy.
On the flip side, one of the side effects of the move is that the cost of loans will go up, probably in the next 30 days, which is to be expected.
However, strictly speaking, the revised rate ought to only apply to new loans, not existing ones.
Applying the new rate backward makes existing loans unjustifiably expensive and also casts Kenya’s interest rate regime as unpredictable, which has a negative impact on both the economy and the country’s rating on the ease of doing business indices.
An economy can’t operate competitively under such a regime. CBK should, therefore, issue guidelines to banks to ensure they enforce the revised rate on fresh loans.
And, should it be necessary, Parliament should feel compelled to pass an amendment that will anchor this policy in law to make borrowing predictable for both banks and borrowers, including the government, which is the single biggest borrower in this economy.
Increasing interest on old loans will adversely affect incomes, hurt businesses and further increase loan distress levels, which are already high.
This is a risk the government ought to consider given that Kenyans are still recovering from the aftershocks of the Covid pandemic and the prolonged drought, both of which conspired to increase debt distress while also reducing business and household incomes.
When the lending regime is predictable, it makes it easier for both the citizens and foreign investors to make long-term business decisions, many of which require financing.
This is why clear guidelines from CBK are critical because they have a direct impact on investment decisions, which, in turn, affect the rate of growth of the economy.
The guidelines will also come in handy in the event that disputes over loans end up in courts.