Mr President, the first thing you must accept is that lending rates and spreads in this country are the highest in emerging markets outside a war zone.

Lending spreads are way out of sync with the emerging markets we want to benchmark with such as Chile, Malaysia and South Africa. Interest rates must be brought down. Period.

However, Mr President, you must not be led to believe that caps is the way to bring down interest rates. Only a foolish man starts building a house from the top.

Send the Bill back to Parliament and give the National Treasury six months to do the following.

First, ask them to start bringing down government borrowing to sustainable levels. Ultimately, the target should be to cause government borrowing to glide down to the EAC monetary convergence criteria of three per cent of GDP.

Mr President, so long as government’s borrowing appetite remains insatiable, interest rates will not come down in any significant way because the rate at which your government borrows is the risk-free rate which the banks use to price loans.

Which brings me to the second thing you must do within the six months period. Mr President, when you look at the statistics for profits for the whole of the banking sector, you will discover that a disproportionate share per bank comes from trading in government paper.

You will notice that in the majority of cases, as high as 50 per cent of what banks make as profits is attributable to money made from trading on government paper. Indeed, what we call banks here are not banks but mere traders.

Although, the licence they are given is for intermediation, banks in this country concentrate on making money from trading with the government.
Mr President, I suggest that you instruct the National Treasury to, within six months of you sending the interest cap Bill back to Parliament, to appoint three or four banks to be primary dealers in government securities.

Biggest depositor

In this way, you will be able take control of the government securities market and apply leverage to influence the direction of rates. Mr President, you must give due recognition to the fact that you — the government — is the biggest depositor in the commercial banking system with hundreds of billions in idle deposits.

Indeed, some studies have shown that the government has in excess of 10,000 bank accounts within the commercial banking system.
Mr President, you should stop borrowing your own money.

Why can’t you direct the National Treasury to pull out all government deposits in the banking system and to bring it all under single management by an entity such as the proposed Government Investment Corporation (GIC) that was recommended by your blue ribbon presidential task force on parastatal reforms of 2014?

And you must break the monopoly which commercial banks have on the Treasury Bill and Bond markets by instructing Treasury Cabinet Secretary Henry Rotich to immediately implement the Treasury-Mobile -Direct system that will allow the ordinary man and woman to purchase government securities.