The Commons

Banking is Not Religion 

banking-bill
“President @UKenyatta has signed the Banking (Ammendent) Bill, on interest rates, into law”: a tweet from the President’s spokesman.

That’s how I received the news. The new law caps lending interest rates at no more than four percent of the Central Bank rate; and savings interest rates at no less than seventy percent of lending interest rates.

Shocker. You could feel the news reverberate across the country like a tsunami. Government capping interest rates? Fixing prices!? The free market policies, of the 1980s, firmly established the global economic orthodoxy. Re-entry of government into markets is viewed as a ticket to recession hell. A cardinal sin that few expected President Kenyatta to make.

It’s the third time that Parliament, in Kenya, has voted to cap interest rates. Previous times, the President has declined to sign the legislation citing the centrality of free markets. Banks have promised to be more sensitive, especially to small businesses. But little has changed and the financial markets have remained a greedy sellers’ market. In 2013, top banks made over fifty percent, from capital, compared to four percent in Europe. Sixty percent of bank profits, in Kenya, are from interest.

Banks became confident that they were untouchable. In the picture above, the President might well have been Adam biting into the forbidden fruit in the Garden of Eden. The officials, around the President’s desk, are an unusual cast for signing a bill into law. They illustrate the seismic nature of the President’s action. They include the Deputy President, Governor of the Central Bank, Attorney General and Treasury Cabinet Secretary. These officials have prompted smiles with a most reluctant smile from the Governor of the Central Bank.

Free market ideas were never intended as creed – sacred and inviolable. It’s true that markets respond more sensitively and faster to supply and demand than government could. Free markets are also the best environments for innovation. However, markets are not perfect. Bigger gaps between the rich and the poor, around the world, are a major sign of market limitations. Markets also exist within different contexts. For example, a poor Kenyan desperate for personal credit will buy it over his phone at over sixty percent interest rate. In recession hit Japan, few are taking up loans that are basically free. To grow these economies, governments in Kenya and Japan cannot apply the same policy catechism.

The public received the new law jubilantly. Internet memes were made warning other high profit takers, like telcom companies, that they too would be whipped into line. Many borrowers expect immediate low loan repayments. On the other hand, bank shares have dropped in value. The stock market drama seems to vindicate the doomsday analysts. These free market high priests predict an apocalypse where shylocks thrive. They anticipate that depositors will have less access to credit and pay more in transaction fees – as banks shrink lending and try to stay profitable.

Good policy making is complex and borrowers are unlikely to end up in heaven or hell. The government needs to manage its many commercial bank accounts (to stop borrowing its own money), better handle its debt, and more accurately set Central Bank rates. Commercial banks need to tighten their belts and also innovate more to bring in more customers. There is no holy book where absolute remedies lie.