All You Need to Know About the Interest Rate Cap & Its Effect on Banks, MFIs & Saccos
A new wave was on the horizon the moment the interest rate cap bill was passed in September 2016. From that point onward, it was clear that banks, Saccos, and other micro-finance institutions were to either find a way to lower the interest rates or face the proverbial long arm of the law. While most of these lending institutions, both big and small, worked around the clock to make the changes, others waited to see if it was going to take effect. And in late 2019, the bill became law, changing the lending landscape forever. But before we talk about the effects of this new law, let’s start by defining what the interest rate cap is all about.
What’s the Interest Rate Cap?
An interest rate cap can be described as a provisional limit to how much the interest rate can increase. The latter is often implemented in a bid to make borrowing, especially from large financial institutions, as favorable as it can be. The interest rate cap is often implemented within a suggested time period, which makes sure that the lending institutions have enough time to make the much-needed adjustments.
Some of the variables that determine the interest rate cap adjustment period may include the state of the economy as well as the closest competition. The closest competitions, in this case, may include Saccos and MFIs. Different interest rate caps come with different percentage point which is more or less determined by the loan’s life. While some loans are short term, others can take years. So, the calculation of the interest rate cap is highly dependent on the life of the loans in question.
How the Interest Rate Cap Will End Up Affecting Banks
The reason for introducing the much-anticipated interest rate cap was to make sure that Kenyans have a new-found interest in borrowing from the banks as they once did. The decree demanded that banks offered the interest rate caps at 14%, which took effect as from October of this year. As expected, banks had to make sure that they were making the necessary adjustments in order to accommodate the new 14% interest rate.
It goes without saying that the new interest capping law has the potential to take a huge bite from the bank profits. So, it would only make sense for them to look for ways to make up for the money lost. One of the ways they did this was by increasing the service charge. It is expected that most banks will increase the amount they normally charge for their services. For instance, some banks will demand more money for over-the-counter as well as ATM withdrawal charges.
The banks will also be forced to cut down on most of their expenditures in a desperate bid to save their precious profit margins. One of the ways to do that is by laying off some of their employees. Of course, a lay off is an ugly process. But it sometimes helps banks, as well as institutions from other fields, stay afloat. Thankfully, laying off is usually the last resort that most banks hope never to get to.
It wouldn’t be surprising to see many banks using the lowered interest rates to try and win more customers. The latter will be meant to have more customers taking loans so that they can cover the money lost due to the implementation of the interest rate cap. There will be an increase in both traditional as well as new means of advertising that will chrome on our TVs, radios, the banners on the streets, social media and so on.
The Effects of The Interest Rate Cap on Saccos And MFIs
As expected, Saccos and other MFIs have responded to the newly-implemented interest rate cap by coming up with their fair share of cuts. These interest cuts are geared towards keeping them competitive and therefore attractive to new members while retaining the old ones. Since the interest rate cap for banks and other big lending institutions being put at 14%, it is expected that most Saccos and MFIs will strive to either keep their interest rate at 14% or go much, much lower. Either way, it goes, it’s Kenyans who win when all is said and done.
Some of the Saccos, which had kept their rates as high as 24%, are either reviewing or have already pushed them down, with the interest rate cap being the ultimate benchmark. For instance, Mwalimu Sacco, deemed the biggest Sacco in Kenya with its 60,000 members, has pushed its interest rate from 24% all the way down to 14%.
Cosmopolitan Sacco, a teachers Sacco based in Nakuru, was quick to amend its interest rate to 13%. Its effect took place as soon as the interest rate cap was made public by President Uhuru Kenyatta himself. Most of the Saccos across the country have however retained their normal interest rates, which is roughly 12% interest. If they are to make any changes, then they are more than likely to lower it further down.
Other Saccos, on the other hand, haven’t changed much as far as their interest rates are concerned. From the looks of it, it seems as though they are comfortable with whatever it is they are offering to their bona fide members and don’t see the need to panic with the 14% interest rate cap that has the entire country talking. One such Sacco is none other than Mwalimu Sacco’s FOSA which has its interest rate at 18% down from 24%. The latter only applies to its 24-month advance loan payment package.
The latter is so because of reasons best known to them. The FOSA 12-month advance loan payment package was put at 15%, which is down from 18%. Despite being lower, these two advance loan packages are still over 14%, which goes to show the kind of confidence Mwalimu Sacco has in their dealings. Other than that, most other Saccos are working around the clock to keep their interest rate at 14%, if not lower.
A Final Word
As Kenyans, it goes without saying that the interest rate cap phenomenon has come with its fair share of excitement. Many of us who weren’t really too keen on taking loans any time soon are now overly interested in looking for the best Saccos to join or the best banks to secure a loan from, which is actually a good thing. The only issue that Kenyans need to be wary of is allowing that excitement push them into borrowing when doing so isn’t quite necessary.
Also, it’s still quite early to determine whether the newly imposed interest rate cap is good for the Kenyan economy or not. The latter is simply because, despite the bill being passed back in September of 2016 and later implemented a month ago, there is still little to no data on its direct as well as an indirect effect. But as soon as the relevant financial data starts trickling in, you can always count on us to fill you in immediately.
That said, if you ever find yourself excited about the interest rate cap, take a seat. Any plans of borrowing should be put off for at least a week before being revisited. If you still want to borrow for whatever reasons, then go ahead and seek advice and only proceed when the fortune’s favour you because interest rate cap or no interest rate cap, paying a loan with interest is still a task that requires a lot of discipline.