The capping of interest rates at 14 per cent has done more harm than good to the Kenyan economy eighteen months after its introduction, a new study shows.
The study by Central Bank of Kenya sought to find out the impact of interest rate caps before and after the interest rate capping law, amidst ongoing plans for its review.
"Implementation of the law was expected to lower the cost of credit and increase access. However, emerging evidence points to adverse effects of the law on the Kenya economy," the study says
Among the findings of the study is that the caps have infringed on the independence of Central Bank and complicated the conduct of monetary policy, making it produce perverse outcomes.
It also reveals evidence of small borrowers being turned away by large banks due to an increase in declining loan accounts and more lending to government and large corporate firms. This has further seen a decline in credit to the private sector.
But it was reported on Monday that
Kenyans will now pay 0.5 basis points less on all commercial loans following a revision of the policy rate from 10 to 9.5 per cent, meaning Kenyans will pay 13.5 per cent on loans compared to the 14 per cent.
BORROW LESS
Early this month, Kiambu MPJude Njomo and Kenya National Chamber of Commerce chairperson Kiprono Kittony called on the government to borrow less from local banks in order for them to have money to lend to the public.
Njomo introduced the interest rate cap bill to Parliament in 2015. The bill signed to law by President Uhuru Kenyatta in September 2016 has seen many banks, policy makers and key stakeholders in the financial sector call for its repeal claiming it is hurting the economy.
While the structure of the banks' revenue has started to shift from interest income ,the study also found a couple of banks are exploiting existing approval limits to increase fees on loans in a bid to offset losses in interest income.
Other outlined effects of the cap, according to the study, include lower economic growth in 2017 - a decline of 0.4 percentage points. This was due to the roll out of micro, small and medium enterprises (MSMEs) from the credit market by commercial banks, and a significant decline in profitability among small banks.
Following rising outcry from the public and stakeholders, the bank reduced the Central Bank rate to 9.5 per cent, from 10 per cent, bringing the capping of interest rates to 13.5 per cent since it was introduced.
CBK Governor Patrick Njoroge has also revealed plans to complete outstanding policy reviews not limited to that of interest rate caps by June this year, a move likely to see the cost of loans rise.
On March 16, Treasury CS Henry Rotich said caps on commercial interest rates imposed in 2016 are unsustainable and that the government plans to modify them without driving up lending rates.
Details: