The International Monetary Fund wants interest controls enforced last September removed.
IMF said that while the rate caps are manageable short-term, they could destabilise the financial services sector long-term.
“Although the adverse effects of the controls are manageable in the near term, if maintained, they could potentially pose a risk to financial stability,” deputy managing director and acting chair Tao Zhang said in a statement on Thursday.
“Therefore, it is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency of the banking sector.”
The Brettonwoods institution, which completed its routine review on Kenya on Wednesday, said the caps were also a threat to the country's “robust” economic growth.
Kenya's macroeconomic outlook, Zhang said, is positive with reduced external imbalances.
“However, interest rate controls are likely to reduce access to credit, weighing on growth,” he warned. “They also complicate monetary policy and adversely affect banking sector profitability, especially for small banks.”
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Kenya Bankers Association has said micro- and small-sized enterprises could be struggling to get loans from banks as a result of the rate caps,. following enforcement of the Banking (Amendment) Act,
2016 on September 14 last year.
“We have noted that the interest rates controls may have had an adverse impact on micro and small businesses in terms of loan approvals and disbursements," Nuru Mugambi,
KBA director for marketing and communications, told the Star in an email.
The IMF team said it completed the first review of the country's performance under the Stand-By Arrangement (SBA) and an arrangement under the Standby Credit Facility.
The two programmes are valued at $1.5 billion (about Sh155.98 billion) for two years from March 14, 2016. They are meant to cushion the country against external shocks, largely depreciation of the shilling.
“Kenyan authorities have indicated that they will continue to treat both arrangements as precautionary, and do not intend to draw on the SBA and SCF arrangements unless exogenous shocks lead to an actual balance of payments need,” the IMF said.