A fact is a piece of data subject to objective, independent and sometimes scientific verification. For example, the geographical coordinates for the house of Kenya’s Parliament are 1°17′24″S 36°49′12″E. That is a fact. The Banking Amendment Act (2016), better known as the interest rate capping law, that Parliament passed has been fairly ineffective. That is a feeling, my feeling to be precise. Furthermore, what characterized its drafting, accelerated legislative approval and subsequent conversion into law in August 2016 was largely based on feelings.

Last month, the Central Bank Governor, Dr. Patrick Njoroge, appeared before the Finance, Planning and Trade Committee of Parliament where the subject of the proposed repeal of the interest rates capping law came up. The feedback from members of the Committee was as expected. Beginning with the originator of the law, Mr. Jude Njomo, the media quoted him as saying, “We know banks are not lending to SMEs because that is what they promised to do when we were enacting the law. They are now working as cartels on that promise as they did with high interest rates.” (Feelings!)

Mr Njomo breathlessly continued according to the same media reports – words in parentheses are mine for emphasis: “According to our Constitution, Central Bank Governor and Treasury have no power or mandate to amend laws. (Major Fact!) That is the prerogative of parliamentarians and therefore, the rest who are speaking (on the repeal), are just making noises that will change nothing.” (Major Feelings!)

The intersection between facts and feelings makes the difference between a good piece of legislation that is informed by and designed with credible data at hand and a bad one that is informed by and designed with peurile emotional reaction. Treating feelings as facts, which underpin the creation of legislation that has a far reaching macro-economic impact, is fraught with danger. In March 2018, the Central Bank of Kenya (CBK) launched a report titled “The Impact of Interest Rate Capping on the Kenyan Economy”. The 37-page draft report is a must read for anyone interested in the back story of how the banks have been enjoying a fairly good performance run and is replete with tables and graphs demonstrating data over the last five years on bank interest rate spreads, return on assets and return on equity with a comparison to other countries’ experiences. (A whole bunch of facts!)

The first part of the report does a good job of laying the groundwork to demonstrate that indeed the banks did need to have a courageous conversation with an accountability partner about the relatively generous returns they were enjoying compared to their African and global peers. The second part of the report goes into more detailed facts about the actual impact of interest rate controls in multiple jurisdictions and then provides empirical evidence from a number of surveys done in Kenya on the tightening credit standards in banks and subsequent shrinking of credit extension to borrowers.

Of great concern however, is that in playing its role as a creator of legislation, Parliament has inadvertently usurped the role of CBK as the body charged with formulation and implementation of monetary policy in Kenya. The interest rate capping law directed that the Central Bank Rate (CBR) be the index against which deposits and loans are priced. The CBR is a monetary policy tool used to increase or decrease demand in the economy; a lower rate means it wants to stimulate the economy by lowering prices while a higher rate means it wants reduced lending through higher prices, perhaps due to high inflation and an overheating economy. Monetary policy tools help to drive demand but do not drive supply which is what the interest capping law is trying to achieve dually.
By tying CBR to the lending and deposit rates, Parliament has tied CBK into a veritable knot. If it raises the CBR so that the pricing can get to a level that allows banks to price for the credit risk appropriately, it impacts on the overall monetary policy by raising prices upwards. If it lowers the CBR to jumpstart the economy through signaling lower rates it simply tightens the credit market even further as banks are even more constrained to provide the appropriate cover for the credit risk.
The moral of this story is that while legislative drafting for any economic matters may be motivated by feelings, they must be informed by reams of fact. After all, fact and feelings are like oil and water; they don’t mix too well.
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Twitter: @carolmusyoka