Should Interest Rates Be Regulated?

Interest rates in Kenya have been the subject of intense debate for more than two decades, dividing policymakers, economists, lenders, and consumers. While some argue that regulating lending rates protects borrowers from excessive charges and promotes financial inclusion, others maintain that interest rate controls distort the credit market, discourage lending, and ultimately reduce access to finance. The debate over interest rates in Kenya continues to shape the country’s banking sector, financial markets, and regulatory landscape.

This debate over interest rates in Kenya 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 Once the electoral dust had settled, the government, through the Finance Act, 2018, repealed the floor on deposit rates.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. These developments marked a significant turning point in the regulation of interest rates in Kenya.

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 14^th, 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 Parliament ultimately repealed Section 33B through the Finance Bill, 2019, preempting the court’s suspension period from lapsing.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 in Kenya 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 over interest rates in Kenya will continue to shape the country’s financial landscape for the foreseeable future.

It remains to be seen whether future legislative or judicial interventions will strike the right balance between consumer protection and market freedom. As the law governing interest rates in Kenya continues to evolve, businesses, lenders, borrowers, and investors should remain informed of legislative and judicial developments. We will continue to monitor these changes closely.

If you need legal assistance or advice relating to interest rates in Kenya, loan structuring, banking regulation, or any related matters, please feel free to reach out to us at peter@pmlaw.co.ke.

This article is intended for general information only and does not constitute legal advice. If you require legal advice on banking regulation, financial services, or commercial law in Kenya, please contact PMA Advocates for guidance tailored to your specific circumstances.

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