The Donde Act must rank as the most contested law ever devised in this country. The entire banking and financial establishment – from the IMF and Central Bank to the local banks – is ranged against it. Its repeal is one of the key conditionalities that the IMF has set for a resumption of its lending programme with the Kenyan government.

But while the bankers are totally against this law, the political establishment and the people are for it. To put it crudely, what be termed as the "informed" economic and financial opinion is completely set against this law, while populist opinion is wholly for it. Unfortunately for the IMF, the World Bank, donors, the Central Bank et al, it is the political establishment through the National Assembly that makes laws, notwithstanding judicial activism. And that establishment has made it as clear as day that the law will stand.

The Donde Act is forcing Kenyans to address the fundamentals of the political economy of market-led growth and development. The informed financial opinion sees the law as bad economics in that it seeks to regulate the price of money in a liberalised economy, which will result in a greater deepening of the banking and fiscal crises. This would have a domino effect by creating pressure for other price regulation in key areas such as education, health, transport, food and housing – in effect, re-establishing price control by the "back door".

In other words, the fight against the Donde Act is not just about interest rates and the banking sector, it also about hammering the first nail into liberalisation’s coffin. The popular opinion is that controlled rates worked very well until the early 1990s, allowing many Kenyans to own property, to start enterprises, and to access the money markets.

Since liberalisation came into being, stratospheric interest rates have worked against all that was achieved. It has become exceedingly difficult for ordinary Kenyans to borrow, and most who have borrowed are losing property and businesses painstakingly built up over the past quarter of a century to banks and financial institutions that only care about usurious interest rates. 

Both sides agree that non-performing loans (NPLs) have a great bearing on the current interest rates. But they differ in their analysis. While the banking fraternity tends to see NPLs as a financial crisis, popular opinion sees it as a political crisis. It seems wrong, even immoral, that banks that lent carelessly to politically connected but financially delinquent individuals and firms should visit the profligacy of their clients on ordinary borrowers who are struggling to keep to the terms of their loan agreements, even at the cost of losing just about everything but their lives.

To all intents and purposes, except for "informed opinion," everyone else seems to see the problem as one in which profligate banks, together with their even more profligate and delinquent borrowers, egged on by a fiscally imprudent government, have conspired to create an interest-rate regime that will eventually destroy any chance of creating a property-owning and entrepreneurial middle class in Kenya. 

If this is really the case, then it is not surprising to find both popular opinion and the political establishment seeking a solution that is essentially political, having come to the conclusion that the financial sector does not have the collective will or group interest to deal with the matter in a self-regulating or market-oriented manner.

This thinking fuels the common sentiment that banks are making huge profits from government securities and those loans that are performing, while the problem lies with the loans that are not performing. At the same time, while regular customers or borrowers cannot get away from delinquent borrowing except if they have political connections, the banks are getting away with bad lending practices by living off the good customers and borrowers.

It is now conventional wisdom that banks have profited in the liberalised decade, getting their own back from politically connected delinquents by fleecing the regular customers and borrowers, or by buying government securities. It is not surprising to find that, in effect, the Donde Act is an effort to stop the banks from profiting excessively from both performing loans and government securities, and to have them address the problem of NPLs politically rather than visiting the cost of their failures on faithful customers and borrowers. 

Should the Donde Act come into full operation, it will do exactly the opposite by protecting the regular customer and prudent borrower while punishing all banks that have lent imprudently by making them bear the full cost of the NPLs.

Several banks will collapse under the weight of their NPL portfolios. Others that find prudent lending difficult under strict regulation may opt to close.

Indeed, for a while, credit may become even tighter, as banks decide what do with the NPLs and how to adapt to the narrow spread. But several banks will after a while find that they are able to make a good living, and resume prudent lending.

In many ways, one wishes it had not come to this. But as long as commercial banks and the Central Bank refuse to address the NPLs politically, it is far better for the ordinary saver and borrower to live under the constraints and difficulties that will arise from the implementation of the Donde Act, than under an unfettered and plainly usurious liberalised market, no matter how sound the economic theory supporting the latter position appears. 

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Mlodi Mdamu is a political analyst based in Nairobi.